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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Applied Materials

November 20th 2009 Applied Materials
Nasdaq Symbol: AMAT
Industry: Chip equipment
Price as of 11/20: $12.28

The chip sector has been on a roll, posting better than expected earnings and better guidance for 2010, thanks in part to the release of Windows 7 and pent up demand. Every indication is that PC sales and chip sales should be strong next year. Another sector within this food chain that will benefit from the strong sales in chips are the chip equipment makers. This week we'll feature the largest chip equipment maker, Applied Materials. Typically when the chips perform well and start making money, they open their wallets to the chip equipment sector. The fundamentals are definitely improving for the chips coming out of this tough recession. There will be fits and starts to the business, but the next year or two should show improvements in the chip and chip equipment space, benefiting Applied Materials.
The Santa Clara based semiconductor equipment company reported fiscal fourth quarter profits of $138 million, or 10 cents a share, compared with a profit of $231 million, or 17 cents a share, for the year earlier period. Adjusted income came in at 13 cents a share. Revenue was $1.53 billion, down from $2.04 billion for the same quarter last year. Analysts had expected the company to report earnings of 3 cents a share on revenue of $1.32 billion, according to a consensus survey by FactSet Research. Looking forward to 2010, Applied Materials was very bullish. Applied said it expects net sales to grow by more than 30% in fiscal 2010. That's a great sign. For the current quarter, Applied said it expects net sales to grow 10% to 25% sequentially, which translates to a range of roughly $1.68 billion to $1.91 billion. The company also said it expects GAAP earnings of between 4 cents a share and 8 cents a share. The momentum is on their side.
A number of analysts are warming up to the stock. The Opppenheimer analyst notes that they have been bullish on a cyclical recovery in semi-cap equipment starting in the second half of 2009, and extending well through 2010. The analyst is raising their full year 2010 earnings estimate to 61 cents from 17 cents. With the earnings estimates moving higher, the valuation keeps improving. Currently, the stock trades for a PE of 20 times next years earnings, but just 13 times 2011 earnings. The stock also trades for 2 times sales and 2.3 times book value. The stock also provides a dividend which only a few blue chip techs provide. Currently the stock provides 24 cents for a 1.9% dividend yield.