Why Is Applied Materials (AMAT) Up 5.1% Since Last Earnings Report?

It has been about a month since the last earnings report for Applied Materials (AMAT). Shares have added about 5.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Applied Materials due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Applied Materials Q4 Earnings & Sales Top Estimates

Applied Materials Inc. reported fiscal fourth-quarter 2019 non-GAAP earnings of 80 cents per share, which beat the Zacks Consensus Estimate by 4 cents and improved 8.1% sequentially. However, the figure declined 5.9% year over year.

Net sales of $3.75 billion surpassed the Zacks Consensus Estimate by 1.9% and were within management’s guided range of $3.535-$3.835 billion. The figure improved 5.3% from the fiscal third quarter but marginally decreased0.1% from the year-ago period.

The company witnessed solid momentum in key geographies namely United States, China and Taiwan. Additionally, strong investments by foundry logic customers and acceleration of the 5G roadmap drove fiscal fourth-quarter results.

Following strong fiscal fourth-quarter results, its shares were up 4% in after-hours trading. Encouragingly, the company provided strong guidance for first-quarter fiscal 2020.

Let’s delve deeper into the numbers.

Segments in Detail

The Semiconductor Systems Group generated $2.3 billion sales in the reported quarter(contributing 61% to its net sales), reflecting an increase of 2.5% year over year.

Applied Global Services reported sales of $977 million (26% of net sales), which increased 0.1% from the prior-year quarter.

Sales from the Display and Adjacent Markets came in at $457 million (13% of net sales), down 12.1% from the year-ago level.

Revenues by Geography

United States, Europe, Japan, Korea, Taiwan, Southeast Asia and China generated sales of $412 million, $147 million, $471 million, $471 million, $919 million, $135 million and $1.20 billion, contributing 11%, 4%, 13%, 13%, 24%, 3% and 32% to net sales, respectively.

We note that sales in United States, Taiwan and China were up 17.7%, 55.5%and 5.5% year over year, respectively. However, Applied Materials’ sales in Europe, Japan, Korea and Southeast Asiadeclined39%, 33.8%, 11.5% and 31.5%, respectively.

Operating Results

Non-GAAP gross margin was 43.8%, contracting150 basis points (bps) from the year-ago quarter.

Applied Materials’ adjusted operating expenses, as a percentage of net sales, contracted 10 bps on a year-over-year basis to 20.5%.

Further, non-GAAP operating margin of 23.7% in the reported quarter contracted 140 bps from the prior-year quarter.

Balance Sheet & Cash Flow

At the end of the fiscal fourth quarter, cash and cash equivalent balance was $3.13 billion compared with $3.01 billion at the end of fiscal third quarter.

Inventories were $3.47 billion compared with $3.54 billion in the fiscal third quarter. Accounts receivables increased to $2.53 billion from $2.37 billion in the fiscal third quarter.

The company returned $500 million and $194 million through stock repurchases and cash dividends, respectively.

Notably, Applied Materials generated cash flow of $826 million, up from $787 million in the fiscal third quarter.

Guidance

For first-quarter fiscal 2020, Applied Materials expects net sales to be approximately $4.10 (+/-$150 million). 

Non-GAAP EPS is expected in the range of 87-95 cents. 

Bottom Line

Management remains optimistic about the price elasticity of NAND, which is expected to bolster NAND customer spending in the near term. The demand for foundry logic is improving, thanks to rising need for specialty nodes in automotive, power, IoT, communications and image sensor markets.

Also, ongoing inventory correction in DRAM is a tailwind for the near term. The company expects more clients to upgrade their equipment ahead of the 5G rollout in key markets, which will help it to expand top-line growth.

The company’s expanding etch footprint bodes well for the semiconductor portfolio. Moreover, its strengthening momentum in conductor etch is aiding it to gain traction in DRAM and NAND. Additionally, the company remains confident about its relentless focus on research and development activities to develop new products.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 27.42% due to these changes.

VGM Scores

At this time, Applied Materials has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Applied Materials has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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