Applied Materials (AMAT) reports tonight after the bell

One of the large-cap tech stalwarts from the 1990’s reports tonight after the bell and if we used the phrase “how the mighty have fallen” it wouldn’t be too far afield in terms of accurately describing AMAT and how it has traded over the last 12 years.

Tonight, analyst consensus is looking for $0.24 in eps, on $2.399 bl in revenues for expected year-over-year declines of 35% and 16% respectively. While earnings estimates have been fairly steady since the last report, revenue estimates have ticked slightly higher. Eps estimates for fiscal ’12 and ’13 have been fairly steady at $0.95 and $1.13 since last August, so downward revisions have pretty much stopped in the last 9 months.

Last quarter, AMAT unexpectedly boosted guidance for this quarter, although the stock is trading 10% lower than when it reported ($12 versus today’s $10.50 per share).

As part of the semiconductor capital equipment space, AMAT has gone from a growth stock of the 1990’s to a true value stock in 2012. I think part of that is the deflationary decade in which we now reside where semiconductor and semi cap equipment companies have a tough road to hoe with high capex requirements and a brutal pricing paradigm.

Here are the valuation metrics on AMAT using last quarter’s data as well as current revenue estimates and market cap:

* AMAT is trading at 13(x) and 10(x) ’12 and ’13 eps estimates of $0.95 and $1.13;

* Price to sales is 1.5(x) assuming tonight’s revenue number is met;

* Price to book is just under 2(x) with a $6.60 book value;

* Price to cash-flow and price to cash-flow per share is roughly 7(x)

* Price to free-cash-flow and price to FCF per share is 8(x)

* AMAT’s free-cash-flow yield is 12.5% (that is 4q trailing free-cash-flow divided by market cap);

* AMAT’s current dividend yield is 2.86%, 100 bp’s better than the current 10-year Treasury yield of 1.75%

Japan is roughly 10% of AMAT’s revenues and 8% of last quarter’s orders so given the Tsunami and earthquake last year, we are lapping easier comp’s for the rest of 2012 for AMAT.

On a day where the Facebook IPO is garnering all the attention, the sentiment around AMAT is absolutely horrid, expectations are very low, the stock is attractively valued, and the stock price is trading below last quarter’s price even though AMAT raised guidance for this quarter, not to mention AMAT faces easier comp’s for the rest of calendar 2012.

We like to look for this combination of factors around earnings and remain long the shares although this isnt a recommendation to buy or sell. Within our portfolio allocation, AMAT is considered “value tech” and is owned in client accounts as a longer-term value play around some of our growthier names.

(Long AMAT)

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