Event: AMAT will report its fiscal Q4 earnings today after the close. The options market is implying about a 2% move vs the 4 quarter average move of about 1.75% and the 8 quarter average move of 2.5%
Sentiment: Wall Street analysts are relatively neutral on AMAT, with 11 buys, 8 holds, and 4 sell ratings on the stock. The average 12 month price target is ~$18.41, and short interest sits at just 2.3% of the float.
Options Open Interest: Total open interest is skewed towards calls by a ratio of 1.6 to 1. The 1 month average volume has also been skewed to calls as well, but by a ratio of just 1.2 to 1. The Nov 17 calls have over 15k of open interest, and the Jan14 15 calls have over 30k of open interest. Farther out, the Jan15 17 calls have over 10k of open interest. No large open interest on the put side.
Technicals: I discussed the recent 5 year breakout in yesterday’s Deep Dive:
Third, the stock made a new 5 year high in late Sept after the announcement of its merger with Tokyo Electron (AMAT shareholders will own almost 70% of the combined company), and the stock has held that breakout ever since:
AMAT weekly chart, Courtesy of Bloomberg
The $17 level is the obvious spot to watch on the downside, as AMAT has held that breakout for more than a month now. However, the stock has been very quiet, unable to make much progress above $18 either. That’s the tight range to watch.
Fundamentals: Once again, from my Deep Dive yesterday:
The industry’s maturation is leading to consolidation. However, much more important than the respective product mix or merger synergies will be the macro environment for the overall semiconductor industry going forward.
Despite an improved global economy, the semiconductor cycle turned lower in 2012 due to overcapacity. To get a sense for how much such cyclicality can affect a supplier like AMAT, here are the annual EPS numbers over the past 10 years: $0.22 in 2003, $0.90 in 2004, $0.67 in 2005, $1.12 in 2006, $1.25 in 2007, $0.62 in 2008, $0.03 in 2009, $1.03 in 2010, $1.18 in 2011, $0.67 in 2012, and expected $0.70 in 2013.
A lot of seesawing back and forth, with growth during macro upswings, and contraction during macro downswings. Analyst consensus projections are for $1.12 in EPS for 2014, $1.35 for 2015, and $1.79 for 2016. If AMAT can actually fulfill those projections, then the stock is most certainly cheap. Given that the company has not been able to string together more than 2 consecutive years of earnings growth in the past decade though, the odds of such future consistency seem quite low. At 25x 2013 EPS, AMAT hardly feels like a bargain, with plenty of uncertainty to boot.
Vol SnapShot: The stock’s implied and realized volatility have been in a tight range the entire year:[caption id="attachment_32594" align="alignnone" width="600"] AMAT 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro[/caption]
We expect that AMAT implied vol remains in the 22 to 30 range as long as broader market volatility remains subdued.
My View: AMAT’s merger with Tokyo Electron is certainly a positive from the perspective of both AMAT and the sector as a whole. Having said that, the merger is also a sign of the increased competition and macroeconomic difficulty that AMAT has faced for 10 years now. Going forward, we view other stocks as much better placed to benefit from trends towards mobile computing in the tech sector. As for this quarter’s earnings, $17 is the key level to watch on the downside given that it’s the breakout level.