There’s 20% Upside For Applied Materials, At Least
It wasn’t all that long ago that analysts at Wedbush and Bank American issued some very bullish comments on the tech-sector. Wedbush said they see another 20% to 30% upside for secular tech-winners. The shift to digital accelerated with the onset of COVID and that shift means revenue and profits for the established and proven tech-leaders. Bank of America chimed in with positive comments on the chip-makers, a fundamental aspect of technology, with strength expected from the gaming sector.
While I agree with both commentaries, I myself prefer companies like KLA Corporation (NASDAQ:KLAC) and Applied Materials (NASDAQ:AMAT) because they make the equipment you need to make the chips. The types of chips will come and go but we’ll always need the equipment to make newer, faster chips and, with the onset of the 5G revolution, the demand for chips is going to skyrocket. What many in the media have failed to recognize is the long-awaited explosion of the IoT is heavily dependent on 5G.
“By addressing our customers’ highest value problems, Applied is outperforming today and is positioned to grow faster than our markets over the next several years,” said Gary Dickerson, president and CEO of Applied Materials in the 2Q press release.
Applied Materials Beats Consensus And Raises Guidance
Applied Materials issued a 2nd quarter earnings report (FQ3) any company would be proud of. The only negative is GAAP EPS fell short of consensus by $0.03 (about 4%) but that is easy to overlook. On the top line, revenue grew 23.6% or just over 500 basis points better than the consensus target. Adjusted gross margins and operating margins both improved delivering solid results for Adj EPS, $1.06 versus the $0.95 expected.
Semi-conductor systems, the company’s largest segment, grew 28% over the last year to bring in $2.9 billion in revenue. Foundry and Logic increased to 55% of the mix. Services and Display also grew on a YOY basis, 11%, and 3% respectively.
Looking forward, the company is expecting to see revenue and EPS grow on a sequential and YOY basis. For the top line, AMAT is expecting revenue in the range of $4.4 to $4.8 billion (target $4.6 billion) versus the consensus $4.35. For the bottom line, AMAT is expecting EPS in the range of $1.11 to $1.23 versus the consensus $1.02.
Regarding the analysts, the analysts are bullish on this stock but perhaps not bullish enough. With the 3Q results in the bag and Q4 consensus at $1.16, the company is firmly on track to beat FY consensus. Considering the fact the company beat in the 3rd quarter is expecting strength in the 4th, and we got a similar message from competitor KLA Corporation the odds are good 4th quarter results will smash the current consensus. And that's why some analysts are already raising their targets.
Applied Materials Dividend Is Worth A Look
The yield with shares of Applied Materials is not as high as I like to see, only about 1.30% with prices near $65, but its good enough and as safe as can be. The payout of $0.88 is only about 22% of earnings and there is ample free-cash-flow to increase the dividend further. There have only been three consecutive current distribution increases, not a lot I know, but the history of increase is good. Over the last ten or so years there have been 7 increases and the last three have been substantial. The 5-year CAGR is over 15% which is something I like to see because it means aggressive growth of the Yield-on-Investment.
The Technical Outlook: Applied Materials Is On The Verge Of A Major Break Out
The 2Q report has shares up more than 3.5% in early action and trading above the all-time closing high and just shy of the all-time intraday high. The move is a confirmation of the uptrend that began with the March low but there is a warning. With shares trading so close to a resistance point and already up off of the moving average waiting for a clear break-out is the best thing to do. At this point, a firm move up from the all-time high may not be enough; a close above the all-time intraday high would be a much better signal.
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