$AMAT Earnings Preview

by Dan February 18, 2016 12:14 pm • Commentary

Event: Semiconductor equipment maker Applied Materials (AMAT) reports fiscal Q1 results tonight after the close. The options market is implying about a 4.5% one day move tomorrow, which is rich to the 4 qtr one day average move of 2.2% and the 3.15% 10 year one day average move.

Semi Capex: AMAT is subject to capital expenditure spending from large semiconductor producers like Samsung, Taiwan Semi (TSM), Micron (MU) and Intel (INTC) which make up nearly 50% of the company’s annual sales. Since INTC’s Q4 report in mid January that included a 5% capex cut for 2016. and a fairly downbeat picture of demand from China, there have been some mixed views from peers. TSM guided to flat capex, Samsung gave a downbeat outlook which spoke to declining spending and Micron is just a mess, with calendar year 2016 sales expected to be down almost 10% yoy.

Price Action / Technicals: AMAT is down about 8.5% on the year, and down about 30% from its 52 week highs, despite eps and sales increase of about 5% yoy in 2015.

The one year chart below shows what appears to be a near term double top in Nov and Dec, and a well defined downtrend since with a series of lower lows and lower highs, with the stock now testing the well defined downtrend:

[caption id="attachment_61496" align="aligncenter" width="600"]AMAT 1 year chart from Bloomberg AMAT 1 year chart from Bloomberg[/caption]

A failure here, could put a re-test of the Aug/Sept double low in play back near $14.

Implied Volatility Snapshot: Short dated options prices are in a rare spot where, 30 day at the money implied volatility (blue line below, the price of options at 36%) are below that of 30 day realized volatility (white line below, how much the stock has been moving at 44%), making options prices look fair, to cheap:

[caption id="attachment_61497" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

My View: I would be surprised to see AMAT give guidance that is at odds with its customers. But with a 2.4% dividend yield, large share repurchase program, cheap valuation and decent balance sheet, in a space that has seem some recent consolidation, the stock does not scream as a potential short. But as detailed above, the technical set up looks poor, options prices look relatively cheap, and it might just be that the broad market sentiment just shifted back to glass half empty after a fairly epic one week rally off of an oversold condition.

No trades stick out to us at the moment but we’ll continue to look at it throughout the day and update on the site if we decide on one.