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Applied Materials has analysts in suspense

Speculation about layoffs and clashing predictions about fourth-quarter guidance should make the company's third-quarter report, due after the bell Tuesday, a closely watched event.

Speculation about layoffs and clashing predictions about fourth-quarter guidance should make Applied Materials' third-quarter earnings report, due after the bell Tuesday, a closely watched event.

Shares in the company were off 32 cents to $44.16 Monday. The stock has dropped from a 52-week high of $88.87 along with other chip-equipment and semiconductor stocks. Though some analysts had been calling a bottom for the sector, most now agree the pain is far from over.

First Call's consensus estimate says the company will report earnings of 3 cents a share on revenue of $1.25 million. Analysts agree the company won't have much trouble meeting those estimates, but can't seem to reach consensus on much else.

Back in May, Applied Materials said third-quarter earnings would be breakeven to slightly positive, and revenue would be in the $1.2 billion to $1.3 billion range. Analysts agreed the company should meet those numbers, with some predicting earnings as high as a nickel a share.

But results could vary depending on whether the company announces long-expected layoffs.

"Expect a largely in-line quarter with potential downside to (a break-even amount), depending on the magnitude of head count reductions," said Salomon Smith Barney analyst Glen Yeung.

Yeung predicts the company may stick to its "adamant stance that it will retain key personnel in spite of the difficulties of the current downturn," though he thinks that informal attrition has brought staff down by 10 percent, or 2,000 positions. The company declined to comment on staff reductions due to a quiet period ahead of its earnings report.

Other analysts expect the company of about 20,000 employees to change its stance.

"We think management is still evaluating a major layoff but has pushed the decision into the September-to-October time frame," wrote Banc of America Securities analyst Mark FitzGerald.

Lehman Brothers analyst Edward White said the company could announce layoffs on its Tuesday conference call, though he added that the probability is relatively low.

Fourth-quarter expectations
Analysts are also divided about what projections the company may give for its fourth quarter.

Based on the company's "very negative tone" at the Semicon West conference recently, Yeung said he expects the company to be "relatively downbeat" on its conference call, with guidance for 20 percent to 30 percent revenue declines and a flat to 10 percent decline in customer bookings.

White actually thinks there could be an increase in fourth-quarter revenue and bookings. The analyst expects the company to have a 20 percent increase in bookings and earnings of 10 cents a share on revenue of $1.35 billion. That's much higher than First Call's prediction for earnings of 5 cents a share on revenue of $1.32 billion.

"The key driver behind our higher-than-consensus estimate for October (earnings per share) is the effect of SAB 101," White said. SAB 101 is a "Staff Accounting Bulletin" issued by the Securities and Exchange Commission in December 1999 about how companies should recognize revenue in their financial statements. Applied Materials said in a recent filing that it will adopt the new regulations in its fourth quarter.

Other analysts looked further out. ABN AMRO analyst Nikolay Tishchenko reiterated his "add" rating on the stock Monday with a 12- to 18-month price target of $75 a share. His long-term outlook is based on "an expected turn in the company's bookings during the January quarter of 2002."

The only thing analysts could agree on aside from the company's ability to meet third-quarter estimates was the outlook for the semiconductor-equipment sector.

"We do not see a recovery of the equipment industry in the second half of calendar 2001 as was previously expected," Tishchenko said. Analysts all voiced predictions that the industry's earliest hope for a turnaround is now the second half of 2002.