North Coast Solar Stocks

November 12, 2009

Applied Materials: Burned By The Sun

Filed under: AMAT — Tags: , , , , — Jason @ 5:21 pm

By Eric Savitz
barrons.com

Applied Materials (AMAT) yesterday afternoon posted stellar results for the fiscal fourth quarter ended October 25; revenue of $1.53 billion was well ahead of the Street at $1.32 billion, and non-GAAP EPS of 13 cents a share crushed the consensus number at three cents. Likewise, the company said FY Q1 revenue would be up 10%-25% sequentially, which implies $1.68 billion to $1.91 billion, smartly above the Street consensus at $1.4 billion.

As I noted yesterday, CEO Michael Splinter said on the call that he expects the chip industry to spend $18 to $20 billion on capital equipment in 2010, up from $12 billion to $13 billion this year; at the mid-point, that would be an increase of 52%, which while off a nightmarish bottom, is still nice growth.

Splinter also said the company itself will grow revenue at least 30% for the year, which implies revenue of at least $6.5 billion, above the Street at $6.2 billion.

The company also announced plans to cut up to 1,500 jobs.

Investors love beat-and-raise quarters. And they adore headcount reductions. But the stock today took a hit, falling 43 cents, or 3.3%, to $12.82. So what happened?

Well, here’s the problem. If AMAT, the premier provider of semiconductor capital equipment, expects the market for its core business segment to be up 50%, why is forecasting revenue growth of 30%?

I’ll tell you why: because the company is still struggling in the solar sector. Splinter said the semi cap segment should grow at least 40% next year, which is just a matter of math: if you assume a market of $13 billion this year, and $18 billion next year, you get 38.5% growth; throw in some market share gains, and you get growth of at least 40%. If the middle of the range is more likely, then he is low-balling the potential growth. But he also said that the company’s solar business would be in a range of plus-or-minus 10% next year. Splinter said the company should see some growth in the thin-film solar segment, but that troubles remain in the capacity-glutted crystalline silicon solar business.

In short, the solar sector was supposed to provide AMAT with a way to diversify, and make the company less sensitive to swings in the semiconductor cycle. But instead, it has turned the company into a solar play right at the moment when demand for semi cap equipment is picking up. Ergo, the analysts aren’t too keen on the stock.

* Caris & Co. analyst Ben Pang, who has an Average rating on the stock, asserts in a note today that EES, the company’s energy and environment solutions unit, which includes solar, “will probably need to provide a better growth profile” for AMAT’s multiple to expand. He advises betting on Lam Research (LRCX) for a pick up in memory spending, or Cymer (CYMI), as a bet on lithography.
* Pacific Crest’s Weston Twigg, who rates the stock Sector Perform, likewise writes that “the guidance fails to inspire confidence that solar will provide a revenue growth stream for the company,” adding that no growth in the division in FY 2010 “is likely to be viewed as a huge disappointment.”
* FBR Capital’s Mehdi Hosseini has the same concerns. “We remain cautious on overall solar-related bookings/revenues until the overall solar-related demand picture improves,” he writes. Hosseini rates the stock Market Perform.
* Raj Seth, analyst at Cowen, has another worry: He says the semi equipment group will need to see the memory sector begin to build capacity again to get to the “next level,” and says that the PC cycle and holiday selling season will remain “critical.” He stays Neutral on the stock.
* Bank of America/Merrill Lynch analyst Krish Sankar also stays Neutral, and points out that the company’s FY 2010 growth outlook looks “muted” compared to others in the semi equipment group, due to the struggles in solar.

So there you have it: the big diversification move into solar is holding AMAT back.

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