Option Trade 
Applied Materials, Inc. (NASDAQ:AMAT) Calls 
Wednesday, 18th May, 2016

** OPTION TRADE: Buy the AMAT Oct 2016 20.000 call at approximately $1.20. Place a pre-determined sell at $2.40.

Note: No protective stop losses added -- but if you wish to do so make it $0.50.

by Ian Harvey

May 18, 2016

Applied Materials, Inc. (NASDAQ: AMAT), a provider of manufacturing equipment, services and software to the semiconductor, display, solar photovoltaic (PV) and related industries across the world, is expected to report Q2:16 earnings tomorrow, Thursday, May 19 after market close. Analysts expect the manufacturing equipment company to post EPS of $0.32, and revenue of $2.42 billion. Analysts seem certain, as their estimate has not changed in the past 60 days, and the range of 19 individual estimates is only $0.31 to $0.33. EPS have been within a penny of expectations in the past four quarters.

As a whole, the semiconductor industry has been victim to slowed demand growth and shrinking profit margins. In an optimistic approach, Applied Materials is priding itself with exceptionalism. The company is banking on positive changes deriving from implementation of technology with better memory storage, as well as company expansion in China.

Chinese companies use AMAT supplies in many of their electronic products, including smartphone maker Xiaomi. Applied Materials is planning to further expand the China market through investments and projects worth $616 million during the upcoming few years.

In light of these approaches from AMAT, there is to be expected more bullish outlooks from analysts. UBS analyst Stephen Chin reiterated a Buy rating on Applied Materials on April 25, 2016 with a price target of $26.00. The analyst notes, “We reiterate our Buy rating as our China tracker shows 4 of the big incumbent China fabs are buying semicap equipment now.”

Chin further exemplifies positive predictions for the upcoming quarters, mentioning, “Our proprietary China tracker found Intel’s China fab’s semicap purchases last month finally ramped up to $160M. We believe most of this was for litho tools but estimate etchers were $20M and implanters were $15M. Our tracker also found Intel’s China fab purchases of raw wafers dropped to only 3k versus a 20k average recently. This low number suggests Intel may have temporarily shut down its China fab to prep for a multi-quarter semicap installation. We believe Applied will have solid visibility shipping to Intel’s China fab over the next 2-3 quarters.”

The company’s 50-day moving average is $20.72 and its 200-day moving average is $18.73. The firm has a market capitalization of $22.17 billion and a P/E ratio of 17.97. Applied Materials has a 52 week low of $14.25 and a 52 week high of $21.67.

Why Applied Materials?

Applied Materials has a solid product line and management has stepped up investments to prepare for the ongoing transitions to larger wafer sizes and smaller process nodes. The ramp up in FinFET, 3D NAND and new display technology will likely be the catalysts.

There is also scope for share gains on the Display side of the business backed by PVD tools. The drivers of this business are larger TV screens and better mobile displays that involve more complicated production processes and new tools.

Developing trends in mobility, connectivity, video and wearable devices are fueling growth in the industry. This, in turn, is increasing advancement in mobile processors, solid-state storage and interactive displays.

Applied Materials has strengthened its research & development and at the same time stepped up investment in product development.

The company has focused its structure and talent around key areas of value creation. It plans to align its product portfolio in a way that it generates the best returns for clients.

Applied Materials had guided well for the second quarter of fiscal 2016. Revenues are expected to increase 5–10 percentage points sequentially. Non-GAAP EPS is expected to come in a range of 30 cents to 34 cents, compared with 26 cents per share reported in the first quarter.

Applied Materials, Inc. (NASDAQ:AMAT)was upgraded by Vetr from a “buy” rating to a “strong-buy” rating in a note issued to investors last Thursday. The brokerage presently has a $22.02 price objective on the manufacturing equipment provider’s stock. Vetr‘s price target suggests a potential upside of 12.29% from the company’s current price.

Also, several other equities research analysts have recently commented on the company.

• Zacks Investment Research raised Applied Materials from a “hold” rating to a “buy” rating and set a $21.00 price objective on the stock in a research note on Monday, February 22nd.

• B. Riley reissued a “neutral” rating and issued a $19.50 price target on shares of Applied Materials in a research note on Wednesday, February 24th.

• RBC Capital boosted their price target on Applied Materials from $21.00 to $22.00 and gave the company a “sector perform” rating in a research note on Monday, April 18th.

• Pacific Crest reissued an “overweight” rating and issued a $23.00 price target (up from $20.00) on shares of Applied Materials in a research note on Thursday, March 10th.

• Finally, Deutsche Bank reissued a “buy” rating on shares of Applied Materials in a research note on Saturday, March 19th.

Seven research analysts have rated the stock with a hold rating, eighteen have assigned a buy rating and one has assigned a strong buy rating to the stock. The company currently has an average rating of “Buy” and an average target price of $22.59.

Harvey’s Options Volatility Indicator

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the AMAT Oct 2016 20.000 call at approximately $1.20. Place a pre-determined sell at $2.40.

Note: No protective stop losses added -- but if you wish to do so make it $0.50.

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