Applied Earnings: No Great Joy, No Great Misery (AMAT)

Applied Materials, Inc. (NASDAQ: AMAT), the chip equipment giant, is out with earnings and so far there is a very muted reaction to the news.  Net sales rose again to $2.52 billion and its profits came to $183 million from operations with net income of $123 million.  Non-GAAP earnings were $0.17 EPS and that is the important figure.  The real figure to use is $0.29 EPS per the company.  Thomson Reuters had estimates of $0.25 EPS and $2.38 billion in revenues.

Applied now expects net sales in the current quarter ahead to be in the range of flat to up 5 percent quarter over quarter, which comes to a range of $2.52 to $2.646 billion in revenues.  Thomson Reuters has estimates of $2.43 billion.  Non-GAAP earnings are expected to be $0.28 EPS to $0.32 EPS (excludes known charges related to completed acquisitions of approximately $0.01 against EPS).  Thomson Reuters has estimates of $0.26 EPS.

The EES restructuring plan from late July came to a total in charges of $405 million.  The inventory-related charges lowered gross margin by approximately 10 whole percentage points and reduced GAAP and non-GAAP EPS by $0.12. Excluding the EES restructuring plan charges, non-GAAP EPS would have been $0.29.  Applied’s May business outlook was for non-GAAP EPS of between $0.22 and $0.26. At the announcement of the EES restructuring plan on July 21, 2010, the non-GAAP EPS outlook was revised to between $0.10 and $0.14.  Backlog increased by $136 million to $3.13 billion.

• Silicon Systems Group (SSG) orders increased to $1.54 billion, net sales increased to $1.45 billion; orders were foundry 37 percent, DRAM 32 percent, logic and other 18 percent, and flash 13 percent.
• Applied Global Services (AGS) orders were up 23% to $595 million.
• Display orders fell to $242 million. Net sales decreased to $216 million, and operating income was lower, at $64 million or 30 percent of sales.

Energy and Environmental Solutions (EES) orders fell to $353 million, but net sales more than doubled from the second quarter to $387 million (record demand for crystalline silicon solar equipment).

Gross margin was 34.2 percent including the thin film solar equipment inventory charge which lowered gross margin by approximately 10 percentage points.  Operating cash flow was $299 million for the quarter.  Applied used $100 million to repurchase 7.9 million shares of its common stock and it ended the quarter with some $3.63 billion at quarter end.

Applied closed down $0.01 at $11.38 on the report and so far shares are up 0.45% at $11.43 in the after-hours session.  Its 52-week trading range is $10.94 to $14.94, so that 23% pullback from the year’s highs already has a lot baked into the cake here it seems.

It is hard to get too bearish after the sell-off that has already been seen.  It is also hard to get excited about the higher guidance when you consider the state of things and when you consider that the charges changed the data so much even on a non-GAAP basis.

If the company doesn’t run into issues meeting earnings expectations beyond this quarter, the stock might actually have some value investors that can’t ignore it.  With Thomson Reuters at $0.87 EPS for fiscal Oct 2010 and $1.21 EPS for fiscal Oct 2011, it has forward P/E ratios of 13 for this year and 9.4 for next.  As the October period marks the year-end, that gives a normalized blended ratio of only about 11 times earnings.

JON C. OGG