Should You Buy Applied Materials (AMAT) Ahead of Earnings?

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Shares of Applied Materials (AMAT Free Report) closed relatively flat on Tuesday, just one day before the semiconductor equipment supplier is scheduled to report its latest quarterly earnings results. As a leading supplier to the red-hot chip manufacturing industry, Applied serves as a bellwether for the entire technology sector, and its report should attract plenty of attention on Wall Street.

Applied Materials is one of the world’s largest suppliers of fabrication equipment to semiconductor, LCD, and solar PV cell manufacturers. The company also provides equipment used in the production of coatings for flexible electronics and services related to manufacturing processes and installation.

The strength of the semiconductor industry over the past two years has well documented, and that means that suppliers like Applied Materials have benefitted too. In fact, shares of AMAT have moved about 40% higher in the past 52 weeks alone.

But what does Applied Materials have in store for its latest report tomorrow? Let’s take a closer look.

Latest Outlook

Based on our latest Zacks Consensus Estimates, we expect Applied Materials to report adjusted earnings of $0.97 per share and revenues of $4.10 billion. These results would represent year-over-year growth of 44.8% and 25.2%, respectively.

But of course, earnings and revenue are just two of the many things investors will be concerned with when Applied reports on Wednesday. It will also be important to track the company’s performance in its different business segments to get a better sense of what is driving growth right now.

To prepare for this, we can turn to our exclusive non-financial metrics consensus estimate file. The Zacks Consensus NFM file contains detailed estimate data for business segment metrics and non-financial metrics reported by companies. The data is acquired from digest and contributing broker models and includes the independent research of expert stock market analysts.

Our consensus estimate file is calling for AMAT to post total revenues of $2.84 billion in its Silicons division, which would represent growth of 32.1% from the year-ago period. The Silicons division includes Applied’s semiconductor-focused products and is the company’s largest in terms of revenue. Last quarter, Applied witnessed growth of just 14.1% in this segment.

Meanwhile, our consensus estimates are projecting that AMAT will post total Services revenues of $791 million. That would mark growth of about 13.7% from the year-ago quarter. In the previous quarter, Applied saw growth of 19.9% in this unit.

Earnings ESP

Investors will also want to anticipate the likelihood that Applied Materials surprises investors with better-than-anticipated earnings results. For this, we turn to our Earnings ESP figure.

Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates. This is done because, generally speaking, when an analyst posts an estimate right before an earnings release, it means that they have fresh information which could potentially be more accurate than what analysts thought about a company two or three months ago.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

Just one day before its report, AMAT is sporting a Zacks Rank #3 (Hold) and an Earnings ESP of 0.57%. This is because the company’s Most Accurate Estimate for earnings sits at $0.98 per share, meaning that the most recent analyst estimates have been higher than the consensus. This improved outlook is a good sign heading into the report.

Price Performance and Surprise History

Another important thing to consider ahead of AMAT’s report is the company’s history of earnings surprises and the effect that these surprises have had on share prices.

Applied Materials has an impeccable earnings surprise history and has not missed our consensus estimates since 2013. We have also witnessed the stock respond pretty well to these positive surprises, although this is far from a guarantee.

Another thing to remember is that Applied will likely be taking a huge one-time charge related to the recent U.S. tax reform bill. This will result in a significant difference between GAAP and non-GAAP results, but the overall impact of tax reform could lead to favorable earnings guidance for the next few quarters.

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