Applied Materials Q2 2016: What To Expect

| About: Applied Materials, (AMAT)

Summary

Applied Materials is scheduled to report its second-quarter fiscal 2016 financial results on Thursday, May 19, after market close.

According to 20 analysts' average estimate, Applied is expected to post a profit of $0.32 a share, 10.3% rise from its actual earnings for the same quarter a year ago.

I see high growth prospects for the company, despite the slowing demand for smartphones. Applied has a substantial backlog of $3.11 billion, and the outlook is bright.

The average target price of the top analysts is at $22.92, an upside of 9.4% from its April 21 close price, however, in my opinion, shares could go even higher.

In my previous article about Applied Materials (NASDAQ:AMAT) from February 14, I said that I see robust growth prospects for the company. I argued that despite the slowing demand for smartphones, new smartphones will use higher performance chips, like the next-generation Apple (NASDAQ:AAPL) processor, which are more complex and cost more to manufacture. That will benefit chip equipment manufacturers like Applied Materials. Meanwhile, Applied Materials, the worldwide leader in the manufacturing of semiconductor equipment, delivered another quarter that beat expectations, and its shares climbed 30% since my article was written.

Since the beginning of the year, AMAT's stock is up 12.2% while the S&P 500 Index has increased 2.3%, and the Nasdaq Composite Index has lost 1.2%. Since the beginning of 2012, AMAT's stock has gained 95.5%. In this period, the S&P 500 Index has increased 66.3%, and the Nasdaq Composite Index has risen 89.9%. According to TipRanks, the average target price of the top analysts is at $22.92, an upside of 9.4% from its April 21 close price, however, in my opinion, shares could go even higher.

AMAT Daily Chart

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AMAT Weekly Chart

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Charts: TradeStation Group, Inc.

Last Quarter Results

On February 18, Applied Materials reported its first quarter fiscal 2016 financial results, which beat EPS expectations by $0.01 (4%). Applied's revenues of $2.26 billion for the quarter also surpassed the consensus estimate of $2.24 billion. The company has shown in-line results in most of its last quarters, as shown in the table below.

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Data: Yahoo Finance

In the report, Gary Dickerson, President and CEO, said:

As the market moves into the sweet spot for Applied`s materials engineering technology, we see strong demand for our semiconductor, display and service businesses. We are maintaining a positive outlook for 2016 as our customers make strategic, inflection-driven investments that play to our strengths.

Second Quarter Report

Applied Materials is scheduled to report its second-quarter fiscal 2016 financial results on Thursday, May 19, after market close. According to 20 analysts' average estimate, Applied Materials is expected to post a profit of $0.32 a share, a 10.3% rise from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $0.33 a share while the lowest is for a profit of $0.31 a share. Revenue for the first quarter is expected to decrease 0.9% year-over-year to $2.42 billion, according to 19 analysts' average estimate. Since Applied met estimates in its last quarters, there is a good chance that the company met estimates also in the second quarter.

Book-to-Bill

One crucial parameter when analyzing a semiconductor company is the book-to-bill ratio, which is the ratio between new orders to actual sells. A book to bill greater than one means that new orders exceed sells. Applied's generated orders were $2.275 billion in the last quarter, and net sales were $2.257 billion, which gives a book-to-bill ratio of 1.01. Applied's book-to-bill was higher than one in eleven of its thirteen last quarters; this indicates growing demand for Applied's products. The chart below shows Applied's book-to-bill ratio for each quarter since 2011.

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Source: Applied's Quarterly Reports

I see high growth prospects for the company, despite the slowing demand for smartphones. Applied has a strong backlog; $3.11 billion at the end of the first quarter, and the outlook is bright, according to CEO Gary Dickerson. According to the company, in both semiconductor and display, they see dramatic technology changes taking place. When they look at the advances their customers are making, materials innovation is at the heart of these changes. This creates great opportunities for the company. According to Applied, it has the broadest and deepest talent and technology to enable the materials innovation; that will drive the semiconductor and display industries forward. AMAT's key growth drivers include high market share and unique capabilities in leadership business, strong gains in high-growth businesses, continued services momentum, and growth beyond SSG, mainly on display. As semiconductor companies execute challenging transitions to technologies including 3D NAND, FinFET or 3D CPUs, and 10 nm DRAM, they are counting on AMAT's expertise in materials innovation. AMAT's superior product set and more efficient operations are enabling the company to expand margins and boost profits in a challenging market.

Valuation

AMAT's valuation is good, the trailing P/E is at 19.20, and the forward P/E is low at 12.77. The Enterprise Value/EBITDA ratio is at 12.19, and the PEG ratio is low at 1.04.

In addition, most of AMAT's return on capital parameters have been much better than its industry median, its sector median, and the S&P 500 median as shown in the table below.

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Source: Portfolio123

Applied has been paying uninterrupted dividends since 2007. The annual dividend yield is at 1.91%, and the payout ratio is only 36.4%. The annual rate of dividend growth over the past five years was at 8.2%, and over the last ten years was high at 16.1%. However, Applied has not raised its quarterly dividend payment of $0.10 since May 2013.

AMAT Dividend Chart

AMAT Dividend data by YCharts

The company generated $207 million in cash from operations during the first quarter, paid dividends of $115 million and used $625 million to repurchase 35 million shares of common stock.

Summary

Applied Materials is scheduled to report its second-quarter fiscal 2016 financial results on Thursday, May 19, after market close. According to 20 analysts' average estimate, Applied Materials is expected to post a profit of $0.32 a share, a 10.3% rise from its actual earnings for the same quarter a year ago. Since Applied met estimates in its last quarters, there is a good chance that the company met estimates also in the second quarter. I see high growth prospects for the company, despite the slowing demand for smartphones. Applied has a strong backlog; $3.11 billion at the end of the first quarter, and the outlook is bright, according to CEO Gary Dickerson. AMAT's valuation is good, and the company generates strong cash flow, and returns substantial capital to its shareholders by stock buyback and increasing dividend payments. The average target price of the top analysts is at $22.92, an upside of 9.4% from its April 21 close price, however, in my opinion, shares could go even higher.

Disclosure: I am/we are long AMAT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.