Option Trade
Applied Materials, Inc. (NASDAQ:AMAT) Calls
Monday, August 14, 2017

** OPTION TRADE: Buy the AMAT OCT 20 2017 43.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

by Ian Harvey   

The chip-gear maker Applied Materials, Inc. (NASDAQ:AMAT), headquartered in Santa Clara, manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide, reports fiscal Q3 results after the market close on Thursday. The consensus earnings estimate is $0.83 per share, up 68%, on revenue of $3.69 billion, up 31%, and the Earnings Whisper number is $0.84 per share.

Growth momentum is still high in the SME market, and Applied Materials is set to make new revenue milestones in fiscal 2017 and 2018. Shares of the semiconductor equipment maker Applied Materials have risen 46% this year, after the company reported two strong quarters that surpassed analysts' expectations.

Applied Materials began its slow and steady ascent this year after the company reported a strong first-quarter 2017 in February. Sales increased 45% year over year to $3.28 billion, and the company's non-GAAP (generally accepted accounting principles) earnings per share of $0.67 set an all-time record for the company. That bested analysts' consensus forecast of $0.66 EPS and helped start the company's share-price rise.

Then in May, Applied reported its second-quarter 2017 earnings, with sales jumping by 45% year over year to $3.55 billion and non-GAAP earnings per share popping 132% to $0.79. That easily beat the analysts' consensus earnings of $0.76 for the quarter.

"Applied Materials delivered the highest quarterly revenue and earnings in our history, and we've now set new earnings records for four quarters in a row," said the CEO.  "Across the company we have tremendous momentum as our markets are strong and getting stronger, and we're sustainably growing faster than these markets by expanding our served opportunity and gaining share."

Morgan Stanley analyst Joseph Moore has raised the firm’s EPS estimate for AMAT as continuous increases in memory sales drive equipment demand longer than expected. Meanwhile, demand remains robust in the display market. Moore raised his fiscal 2018 EPS estimate for AMAT from $2.87 to $3.31 compared to its actual EPS of $1.75 in fiscal 2016. He also raised his fiscal 2018 EPS estimate for Lam Research from $10.63 to $12.65 compared to its actual EPS of $9.98 in fiscal 2017.

Applied Materials, Inc.’s 50-day moving average price is $44.26 and its 200-day moving average price is $40.97. Applied Materials, Inc. has a 1-year low of $26.86 and a 1-year high of $47.86. The stock has a market capitalization of $46.30 billion, a P/E ratio of 17.82 and a beta of 1.82.

Influencing Factors

Applied Materials dominates the global semiconductor equipment market and is the world’s largest supplier of WFE (wafer fabrication equipment), flat panel LCD (liquid crystal displays), and solar photovoltaic cells and modules.

Semiconductor manufacturers are transitioning to advanced technology as the industry witnesses the fourth tech shift toward AI (artificial intelligence) and IoT (Internet of Things). Companies like Samsung (SSNLF), Intel (INTC), and TSMC (TSMC) are upgrading their fabrication facilities, or fabs, to advanced nodes and 3D memory technology.

This trend has increased semiconductor capital spending, and AMAT is a beneficiary of this shift thanks to its industry-leading position in the WFE space. This shift has converted the 50-year-old company into a growth stock. AMAT stock has risen 64% in the last 12 months.

According to SEMI’s latest data, worldwide SME (semiconductor manufacturing equipment) billings rose 58% YoY (year-over-year) or 14% sequentially to $13 billion in 1Q17, with the largest growth coming from the Asia-Pacific region. Korea, Taiwan, and China reported YoY growth of 110%, 84%, and 74%, respectively. AMAT’s key clients are located in these areas.

While revenue has been relatively volatile over the past few years, earnings per share have been up robustly since 2013, as a result of a combination of share reduction and growing net income. In addition, the first half of this fiscal year has been much better than the same period last year. It appears that this is a growth company that’s priced like a low grower.

The shares are priced at a 30% discount to the overall market, which reduces the risk of a major sell-off.

Applied Materials is trading at price to earnings (PE) ratio of 17.5x and this tells us the stock is undervalued based on the latest annual earnings update compared to the Semiconductors average of 24.2x and undervalued relative to the current US market average of 23.6x .

Analysts and Hedge Funds Opinions

Vetr upgraded Applied Materials from a “hold” rating to a “buy” rating and set a $48.70 price target for the company in a report on Monday, July 31st.

Also, DA Davidson restated a “buy” rating and issued a $55.00 price target on shares of Applied Materials in a report on Monday, July 10th.

Several other analysts have also recently commented on the company…..

  • B. Riley reissued a “buy” rating and issued a $44.00 target price on shares of Applied Materials in a research note on Monday, May 15th.
  • Needham & Company LLC increased their target price on Applied Materials from $43.00 to $50.00 and gave the company a “buy” rating in a research note on Monday, May 15th.
  • Deutsche Bank AG reiterated a “buy” rating and set a $48.00 target price (up from $45.00) on shares of Applied Materials in a research note on Friday, May 19th.
  • Finally, Stifel Nicolaus increased their target price on Applied Materials from $42.00 to $50.00 and gave the company a “buy” rating in a research note on Monday, May 15th.

Four equities research analysts have rated the stock with a hold rating, twenty have given a buy rating and one has given a strong buy rating to the company. The stock currently has a consensus rating of “Buy” and an average target price of $53.23.

Several institutional investors have recently made changes to their positions in the stock…..

  • James Investment Research Inc. boosted its position in Applied Materials by 1,033.4% in the second quarter. James Investment Research Inc. now owns 34,570 shares of the manufacturing equipment provider’s stock valued at $1,428,000 after buying an additional 31,520 shares during the last quarter.
  • Mn Services Vermogensbeheer B.V. boosted its position in Applied Materials by 524.9% in the second quarter. Mn Services Vermogensbeheer B.V. now owns 180,133 shares of the manufacturing equipment provider’s stock valued at $7,441,000 after buying an additional 151,307 shares during the last quarter.
  • Meeder Asset Management Inc. boosted its position in Applied Materials by 16.9% in the second quarter. Meeder Asset Management Inc. now owns 109,648 shares of the manufacturing equipment provider’s stock worth $4,529,000 after buying an additional 15,819 shares in the last quarter.
  • National Pension Service boosted its position in Applied Materials by 8.1% in the second quarter. National Pension Service now owns 923,224 shares of the manufacturing equipment provider’s stock worth $38,258,000 after buying an additional 69,282 shares in the last quarter.
  • Citadel Advisors LLC added to the holdings in Applied Materials Inc by 288.01%. The purchase prices were between $37.52 and $47.43, with an estimated average price of $42.46. The holdings were 10,981,074 shares as of 2017-06-30.

Harvey’s Options Volatility Indicator

Summary

Applied Materials is witnessing strong growth momentum, with revenues growing in double digits and EPS (earnings per share) growing in triple digits. Such record-high earnings helped AMAT stock outperforms the market and its peers.

The company has been the industry leader for over two decades, and is strongly positioned to benefit from its industry leading position. The stock is up about 44% this year but due to expanding earnings, it is still trading at a reasonable forward PE of 14.88.

As well, investors have more to look forward to with Applied's stock price, as the company is forecasting another great earnings report. Earnings per share are expected to rise 66% year over year at the midpoint, and if they come in at the high end of management's guidance of $0.87, the company will surpass analysts' consensus once again.

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

 

** OPTION TRADE: Buy the AMAT OCT 20 2017 43.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

 

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