LRCX Lam Research Corporation

Following the fourth quarter earnings announcement on November 16, more than half the analysts covering Applied Materials (AMAT) have made downward revisions to their estimates. The reason for the negative revisions may be traced to the weak results and outlook, particularly for the Display and Energy and Environmental Systems (EES) segments that is expected to continue well into 2012.

Last Quarter Synopsis

Applied’spro forma earnings were in line with the Zacks Consensus Estimate as lower revenue and margins were partially offset by strong opex management and a lower-than-expected tax rate.

Revenue growth was weak across the Display and EES (solar) segments, with the Silicon Systems Group (SSG) performing in line with expectations. However, Applied’s penetration in Asiadeepened significantly, helping the Applied Global Services (AGS) segment to exceed expectations.

Orders in the quarter were down 33.0% sequentially due to order declines in display (-91% sequentially) and EES (-3% sequentially). The lower demand for TVs and mobile devices in the display segment and excess capacity in the EES segment were the main reasons for the decline. Gross margins also declined sequentially to 39.6% aslower volumes impacted cost absorption.

Agreement of Analysts

Estimate revisions for the upcoming quarter indicate declining sentiments, with 15 out of 17 analysts making downward revisions in the last 30 days. Also, for fiscal 2012, 15 out of 20 analysts made downward revisions, with only 1 analyst moving upward in the last 30 days.

Analysts, by and large, continue to expect additional semi equipment order weakness in 2012. They believe that significant pressure in both Display (due to slow large TV sales growth) and EES (due to overcapacity and subsidy cutbacks) will weigh on Applied’s core fundamentals.

The analysts believe that both these segments will likely remain under pressure over the next several quarters with the timing of a recovery being uncertain, given the overcapacity issues and macro headwinds.

Very few analysts believe that the display business will improve in the upcoming quarter, banking on investments in LCD/OLED that they expect will enable recovery.

Applied now projects first quarter revenue to be down 5-15% sequentially, with SSG (including Varian) to be up 5-20% sequentially, AGSto be down 10-20% (the combined effect of lower 200mm sales, lower utilization rates and the absence of thin film revenue), and Display and EES to be down 40-60%.

Impact on Estimates

As the majority of analysts have lowered their estimates over the past 30 days, the Zacks Consensus Estimate has fallen 6 cents for the upcoming quarter to 12cents and 16 cents for fiscal 2012 to 84 cents. In the past 90 days, the Zacks Consensus Estimate fell 19 cents for the upcoming quarter and 49 cents for fiscal 2012 to 84 cents.

The significant decline of 48 cents in the Zacks Consensus Estimate for 2012 clearly indicates the uncertainties in the semiconductor business and echoes the general pessimism for both display and solar in 2012.

Conclusion

Though we believe there is potential in the solar energy market over the long term, we remain cautious on the company's efforts since management has already missed several targets to bring its solar division to profitability. Additionally, limited visibility and lower overall semiconductor equipment spending levels are the reasons our Sell rating on the stock.

However, we remain positive about Applied’s strong position in the semiconductor market, the solar business in China, the huge portfolio and strategic relationships, which will however be less effective in the current market scenario.

Applied, which competes with other large equipment makers, such as KLA-Tencor Corporation (KLAC), Lam Research Corporation (LRCX) and Novellus Systems (NVLS),holds a Zacks #5 Rank that translates into a short-term Sell rating.

 
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