Investopedia: Good Luck Figuring Out Applied Materials' Course

It's common knowledge that the semiconductor industry is cyclical and that any company selling equipment for this industry is going to have its ups and downs. Even so, it almost feels like investors considering Applied Materials (Nasdaq: AMAT) would be better served with a Ouija board or tarot deck. Nobody questions that AMAT is a key player in the equipment used to make chips, solar panels, flat panel displays and so on, but it seems no two analysts or investors can agree on where we are in this cycle and how low the next bottom will be. 


A Solid Fiscal Second Quarter
What is certain is that Applied Materials had a solid second quarter. Revenue rose almost 7% on a sequential basis and surpassed the high end of its analyst range. Growth was led by the services and solar businesses, while the core semiconductor business was down about 3% from the prior quarter. Orders were also solid - climbing 7% - with growth everywhere but the solar business and the core chip equipment business matching that overall growth rate.

Going with straight-up GAAP reported results, AMAT saw gross margin improve more than a full point from last year, but come off about 70 basis points sequentially. Operating income was stronger on a year-over-year basis (up 75%), and up strongly on a sequential basis. To the extent that looking at cash flow can help resolve some of the non-cash items that complicate earnings reports, AMAT reported that year-to-date operating cash flow was up almost 26% from the year-ago period. (For more, see Strategies For Quarterly Earnings Season.)


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Investopedia: Applied Materials Gets Two For One With Varian

With Wednesday's announcement of its deal for Varian Semiconductor (Nasdaq:VSEA), Applied Materials (Nasdaq:AMAT) has to get full marks for a shrewd move and a surplus of chutzpah. It was just the other day when a major analyst downgraded Applied Materials on the basis of questions about the semiconductor equipment cycle. Clearly AMAT is playing with a longer-term horizon. 


The Deal
Applied Materials has reached a deal with Varian to acquire the company for $63 per share in cash. That is a total price of $4.9 billion or about $4.6 billion after netting out Varian's cash. At this price, Applied Materials is paying a 55% premium for Varian shares, and giving investors the best price these shares have ever seen (and a 29% premium to the consensus analyst target price, for the very little that is worth). (For more, see Mergers And Acquisitions: Understanding Takeovers.)

What Applied Materials is Getting
In many respects Applied Materials is getting two really interesting businesses in one deal. Varian is a leader in ion implantation systems, tools that basically build transistors on chips through doping. Varian has really benefited from an industry switch towards single-wafer processing and has built a roughly 75% market share in this business. In fact, Varian is well ahead of rivals like Axcelis (Nasdaq:ACLS) and Applied Materials quit this business years ago after finding it too difficult to get competitive traction. 



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