Applied Materials: How To Handle The Earnings Report

| About: Applied Materials, (AMAT)

Applied Materials (NASDAQ:AMAT), the largest vendor of semiconductor manufacturing equipment, announced earnings results on 8/15. The company beat on the top line by $20M and on the bottom line by $0.02, but note that the company previously warned and that the results are mostly in-line with the lowered expectations. None of the company's segments were spared, with chip equipment, display, and solar seeing sequential revenue drops of 41%, 20%, and 44%, respectively.

Guidance was particularly disappointing, with the company expecting a Q/Q decline of 25-40%, which was far worse than the consensus of a 17 drop. EPS is expected to come in at $0.00 - $0.06, significantly missing the consensus of $0.12.

What To Do?

The results and outlook are by no stretch of the imagination good, so I expect a negative reaction when the market opens. Hold off adding to positions or initiating new ones until the stock finds support. In this scenario, a critical level to watch will be the 50 day moving average, currently at $11.04. If it breaks this support, then the next support levels to watch will be $10.38, $10, and then the 52-week low, $9.70. (see chart, courtesy of Google Finance)

The company's long term prospects are intact since the company's equipment is necessary for the fabrication of semiconductor devices. No matter how gloomy the report seemed, keep in mind that Applied Materials still runs a solid business that has an incredibly high barrier to entry. The balance sheet is strong, and cash flow remains healthy.

The 3%+ dividend and the fact that the company is aggressively buying back its shares are also not bad reasons to stick around.

To lower cost basis, opportunistically write covered calls against your current shares (if you have them). To mitigate the risk of adding to your position or initiating a new position, either sell puts in order to get the shares more cheaply, or buy the shares and immediately write covered calls against them.


In short, don't panic. This is a fundamental company to one of the world's most important industries. If you don't have a position, consider initiating one if the stock is driven down significantly; If you do have a position, lower your cost basis, collect the dividend, and know that in order to build the billions of semiconductor devices found in phones, tablets, notebooks, servers, and many other things, there needs to be a fab, very likely with Applied Materials' equipment in it.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMAT over the next 72 hours.

Additional disclosure: I will likely sell puts in order to attempt to initiate a long position.