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Tuesday, February 12, 2008

Applied Materials (AMAT) 1Q:08 Preview

Estimated Reporting Date

Symbol

Revenue Estimate Current Q

Operating Profit Estimate Current Q

EPS Estimate Current Q

EBITDA Estimate Current Q

Revenue Estimate Next Q

Sequential Revenue Growth Estimate, Percent

Operating Profit Estimate Next Q

EPS Estimate Next Q

EBITDA Estimate Next Q

Revenue Estimate Full Year

Operating Profit Estimate Full Year

EPS Estimate Full Year

EBITDA Estimate Full Year

Revenue Estimate Next Year

Operating Profit Estimate Next Year

EPS Estimate Next Year

EBITDA Estimate Next Year

2/12/2008

AMAT

2,007.6

381.5

0.20

480.3

2,064.8

2.85%

426.9

0.22

530.9

8,765.7

1,916.8

1.02

2,166.7

10,126.6

2,567.7

1.34

2,617.5



The skinny: Applied Materials is the behemoth in the semiconductor capital equipment market. By virtue of their size and breadth of their product portfolio, they tend to have the most diversification amongst individual semiconductor subsector end markets. Despite this diversification, memory represented 67% of orders last quarter – roughly 2/3 of that was DRAM, or 44% of overall orders.

For the last couple of quarters, analysts have been looking for a recovery in foundry spending (currently 19% of orders) to help the company to resume a growth curve. I don't see this happening. Foundry capex plans have come in lower than expected and I can't think of any reason they'd be front-end loaded for 2008 with so much fear of economic slowdown in motion.

Display business picked up significantly last quarter (up 80% q/q) and should show continued strength. The company projected a strong revenue ramp in display products beginning in Q2. As most of their compatriots in the display business (Corning, Photon Dynamics) have already signaled the all-clear, I think they'll be strong here and I wish I could buy just this segment but unfortunately it's stapled to the chicken.

The wildcard in their business is solar, where Applied is spending considerable resources and effort to build a multi-billion dollar solar equipment business. This is great long-term. The issue I have with the stock is I think solar's potential has created unrealistic investor expectations of the stock's likelihood to outperform.

I believe many funds are positioned long Applied and short other memory manufacturers, with the hope that the valuation strength the market has bestowed upon solar will insulate Applied stock from the downturn in the semiconductor business. I don't like situations like this -- too many people know the story. I can see the company having great solar orders, and disappointing on overall orders, where expectations are for a much better outlook. Solar is going to be great... but it's also the least known part of the business in terms of the effect on operations. Revenue and margins in the memory and foundry business, 3/4 of current business, should disappoint. The memory business is off a cliff here and the solar business is too on the come to really hold the stock up right now.

I don't see support until $16.20 and I worry about that support with so many people long the same story with the same expectations. That said, if there were a big dislocation down to $14, I would probably buy some and be prepared to hold it for a couple of years.





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