Earnings Preview: Applied Materials should deliver upside surprise

Look for more signs this week that Applied Materials Inc. (Nasdaq: AMAT) has increased its grip on the market for chip manufacturing equipment.

Second quarter earnings are scheduled to be released Tuesday for the world's largest maker of semiconductor capital equipment, and the consensus estimate to beat is 27 cents a share, according to First Call's survey of 25 analysts. Given Applied Materials' track record -- the company easily surpassed profit forecasts in each of the last three quarters -- don't be surprised to see another upside surprise.

Last quarter, Applied (chart) earned $52.8 million, or 14 cents a share, on sales of $724 million. In the second quarter of fiscal 1998, AMAT earned $141 million, or 37 cents a share, on sales of $1.17 billion.

The chip industry finally seems to be emerging from its slump, with non-Japan Asia leading the way, said Min Pang, analyst with Salomon Smith Barney. Taiwanese companies, in particular, along with South Korea's Samsung, are driving demand for wafer fab equipment.

"In the last quarter, we've seen quite a pick up in capital spending," said Pang, who expects Applied to post earnings of 29 cents on $1.05 billion in sales. "We think Applied can do a little better than that (estimate). They've done a remarkable job of gaining market share."

Applied Materials is literally buying market share, said Theodore O'Neill, analyst with Needham & Co. Even in areas where Applied Materials is far and away the industry leader, such as physical vapor deposition equipment used to make chip wiring, the company is making it hard for competitors to compete, he said. "It would appear that Applied is offering things at very, very attractive prices," said O'Neill, whose published estimate calls for a profit of 24 cents a share on $950 million in sales. "And once you're the tool of record, you can start charging for it."

Like Pang and others, O'Neill won't be surprised if Applied Materials tops his forecast. O'Neill also expects the company to report as much as $1.3 billion in bookings for the quarter. Industry estimates indicates that Applied took in 43 percent of all front-end bookings for U.S.-based capital equipment makers.

Applied Materials is the main beneficiary as chip manufacturers now refurbishing their plants to build chips based on the latest miniaturization techniques. "Through technology upgrades, Applied always positions itself at just the right times with the new technology that customers want," O'Neill said. "It's just really good management. And they get really good feedback from their customers."

Applied's stock is on the move. After falling to a low of 21 9/16 in October, Applied shares moved to a high of 71 5/8 in February. Its shares closed up 1 21/32 to 60 11/16 Friday. Twenty-four of the 27 analysts following the stock maintain either a "buy" or "strong buy" recommendation.