ANALYST WATCH: Reacting to Applied Materials

3 min read

Applied Materials' fourth-quarter earnings report sparked mixed reactions from analysts this week. The chip-equipment maker beat the Street by a penny a share in the quarter but lowered its guidance for the first quarter.

Applied (Nasdaq: AMAT) posted a profit of $664 million, or 77 cents a share, on sales of $2.92 billion.

The $2.92 billion in sales was slightly below most analysts' estimates, lending credence to the school of thought that semiconductor demand is on the decline.

Shareholders have already cast their votes on the subject, selling the stock down to a low of $38.50 earlier this week after it peaked at $115 in April.

Applied Materials, along with the likes of Hewlett-Packard (NYSE: HWP) and Intel (Nasdaq: INTC) are widely recognized as key bellwethers of the technology sector. All three have reported less-than-stellar sales and earnings in their latest quarters.

Company officials dampened hopes of a mercurial recovery in the first quarter when it projected sales of between $2.9 billion to $2.95 billion and earnings of between 75 cents to 78 cents a share, below the 80 cents analysts were expecting.

It doesn't help that the presidential election is still in doubt and that the Federal Reserve Board indicated that inflation is still a concern. Any hopes of a potential interest-rate cut evaporated ahead of Applied's earnings report.

On Thursday, Goldman Sachs analyst Gunnar Miller gave a lukewarm endorsement of the stock, leaving it on the firm's "recommended list," saying the fourth quarter was in line and the "forward guidance (was) not as negative as expected."

CIBC World Markets analyst M. Ali Irani reiterated his "buy" rating on the stock while Merrill Lynch's Brett Hodess confirmed his near-term "accumulate" and long-term "buy" ratings but cut the 12-month price target to $55 a share from $76 a share.

Wit SoundView analyst Michael O'Brien, who was expecting fourth-quarter sales of at least $2.95 billion, was less optimistic.

"As we look into the chip-end markets (computers, communication and consumers), we see demand…less robust than we would have anticipated and inventory building up," he said in a research note.

He maintained his year-over-year growth in revenues and earnings of 31 percent, but said he believes a "substantial amount" of risk exists in the stock.

Chase H&Q analyst Eric Chen lowered his fiscal 2001 sales and earnings estimates to $12.25 billion and $3.02 a share from $12.4 billion and $3.16 a share, respectively.

Robertson Stephens analyst Sue Billat was more upbeat, reiterating her "strong buy" rating on the stock.

"At only 12.3 times our calendar 2001 numbers, we believe that investors have factored in an overly pessimistic growth scenario for 2001 that we find unwarranted given its franchise position in the group," she wrote in a research note.

Finally, Mark Fitzgerald at Banc of America Securities provided a little perspective.

"The current environment is better than management’s guidance would indicate," he wrote in a research note. "But why stick your neck out with so many macro issues weighing on fundamentals? Device makers will need to adjust investment plans given the slower growth and given the weakening end market demand. If push-outs and delays are to happen equipment companies will likely see them in the next three months."

After the earnings report and first-quarter guidance, 24 of the 27 analysts following the stock still maintain either a "buy" or "strong buy" recommendation.