AMAT reported the earning after the market close today. Listening from the conference call, the company reported largely inline top and bottom line results. The EPS number of 26 cents was one cent below the consensus estimate. Topline number of 2.28 billion was just a little shy of 2.5 billion expected. Given the downturn that many investors are expecting, these numbers did not have any meaningful implications for the share price. Instead, the investors were seeking any signs of business uptick in the future.
Today CEO Mike Splinter is feeling really bold. The stock price is headed higher after the market as CEO calls for trough (business cycle bottom) this Q. This is in sharp contrast to very cautious stance that other equipment company CEOs are taking in their January earning calls. Splinter sees bottom in logic order this Q and the order is likely to head higher over the coming Qs. He also sees pickup in the memory (flash) segment in the second half of 07. He was also bullish on the flat panel as well as service business going forward. Given the significant underperformance of share price compared to its competitors such as NVLS, KLAC, and LRCX during last upturn, Splinter’s job is perhaps on the line if the stock continues to underperform. In my opinion, Splinter put the job on the line today. If he is right, he will be the hero of the industry by correctly forecasting the bottom and positioning AMAT for the next upturn. If he is wrong, I expect to see someone else in the helm down the road.
Regardless whether he is right or wrong, I continue to prefer other equipment companies over AMAT. The company is too diversified (solar, service, silicon, and flat panel). This may have saved the company from seeing more steep order drop as the other equipment companies. But as the next upturn kicks in, this could work against getting the greater earning leverage. AMAT is also exiting implant business. Implant business is significant portion of overall silicon business. As the device gets more complicated, number of implant steps goes up drastically on the transistor level. I don’t know why AMAT chooses more R&D efforts with solar which does not yield any meaningful revenue over implant which can be a cash cow. With shrinking number of chip customers, increased product life time (taking more time to shrink), and fierce competitions on all silicon process fronts, AMAT has lost its luster as being dominant player in this space. I would be a seller of AMAT above $19. If you believe Splinter and want to play in the semi-equipment space, I prefer LRCX, NVLS, and KLAC as a large cap names. In addition, as AMAT exits implant business, Varian (VSEA) and Axcelis (ACLS) could be superb plays. There are so many more attractive names in this space that I would stay away from AMAT.
As for believing in the bottom for this cycle, I continue to believe that we are just starting to see inventory correction in memory space and could last well into spring and early summer. As such, there will be continued flow of negative news from the chipmakers and equipment makers. I am not sure if all negativities have been baked into the share price of equipment companies. Risk to award ratio is not still favorable in my opinion given the uncertainties with the semiconductor inventory situation. I would rather wait and see to spot firmer signs of uptick. I tend to believe that I would be able to buy all of these names at lower prices. When I feel the time is right, I will reinitiate my old favorite LRCX or NVLS into our core holding idea but I am not in any rush at this moment.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
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