Amat
Interview: Berean Capital---Rakesh, Vijay---Analyst
>> the year-long investigation into possible trading violations among market making firms at the new york stock exchange has come to an end. the nyse chief executive john thain can now get on with the task of making the exchange more responsive to clients. the five largest exchange specialist firms agreed today to pay $240 million to the s.e.c., $155 million of that sum covering investor losses and the rest going to fines. the nyse accused the company of trading ahead of customers. the settlement doesn’t cover individual employees of the firms and th firms may be sued by investors such as state pension funds. applied materials out with its first-quarter earnings. net income for the biggest chip equipment maker came in at $82 million, or five cents a share. sales increased to $1.56 billion. shares of applied materials climbed 75% in the last 12 months and now trade at 42 times this year’s expected earnings, more than double the valuation of the s&p 500 and even higher than the nasdaq’s 100’s forward p.e. of 34. our next guest has a buy rating on the stock. vijay rakesh, analyst with berean capital joins us from our chicago bureau with the why behind the buy. vijay, thank you for joining us. why buy amat at this price?
>> we think amat just finished a broad quarter and is poised at the beginning of the cycle with their realignment plan in place and had a 50% earnings growth surprise. analysts on the street expected eight cents in the last quarter and had 12 cents for ongoing pro forma earnings so even though amat is trading 40 times earnings on a price-to-earnings basis for 2004, that might be a big opportunity to get in with a huge growth cycle. we saw amat shares pull back 20% the last couple of months and we think that should present a buying opportunity because of concerns that orders may drop off in the second half of the year. we think that might be the case. but there does seem to be a secular order growth in place for this year and the next.
>> so the operating profit number, the revenue estimate coming in better than expected, 1.5 billion, but the fact remains that these numbers, profits and revenue, still only half of what they were at the peak in the first quarter of 2000, four years ago. will we ever see those numbers again?
>> we believe in the next peak amat will have earnings in calendar 2005 of about $1.4 a share versus the last peak where e.p.s. was 1.2 so we believe amat will beat earnings on the next peak on much better gross margins and realignment in place and in the last quarter, gross margins improved and operating margins up so we think, combined with market share improvements they’re having and penetration across the board, they should do very well going forward and we think amat finished the quarter and guided 30% higher for the next quarter and we have something in place here.%
>> you must be relieved that the stock is up 5% in the after hours because you’ve had buy on initiated coverage with a buy on september 8 last year. the stock was at $21.74. amat essentially prior to today has done nothing in five months. the s&p 500 is up 11% and you’ve been hanging in there tough with the bull bet for five months and are now starting to hopefully reap the profits from your call?
>> you bet. i think the street was expecting orders to taper off and we’re actually seeing the opposite. we see orders increasing 30% sequentially for the first quarter of 2004 ending january and next quarter ending april and as amat mentioned on the conference call, you should see orders increase over the rest of the year so even though there was concern that momentum was peaking, we think there is still still, this momentum has more legs to go so we think there is still room to run for amat at least back to the $26 levels we saw in november or so.
>> 30 seconds left, my friend, is this good for the whole group? is this telling us better times are ahead for all capital equipment companies?
>> it should be. amat is the bellwether of the group but we should be cautious looking at the rest of the members as amat has a couple of things going for it, a realignment plan generating reserves today, 50% increase in earnings leverage, gross margins and operating shares improving and across the board, l.c.d. and flat panel displays as mentioned.
>> thank you very much, vijay rakesh, analyst with berean capital based in chicago.
