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Stock Analyst Update

We Still Like Applied Materials despite Ugliness

Chip-equipment maker is poised to outperform its competitors.

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What Happened?
Applied Materials (AMAT) reported fiscal first-quarter profits of $0.66 per share Tuesday evening. These results exceeded First Call's consensus estimates by 6%, but they came off of management's lowered growth projections from January. Not surprisingly, sales decreased by 7% from the previous quarter. Moreover, new orders for the firm's chip equipment fell off a cliff, and many customers either delayed or canceled existing orders. In light of the poor near-term outlook for many chip-equipment and chip makers, Applied's management lowered its guidance for the next fiscal quarter, projecting a sequential sales decline of roughly 25%. 

What It Means for Investors
Although Applied Materials' short-term outlook is both poor and uncertain, we continue to feel that the firm remains the most solid investment idea in its sector. The chip-equipment giant's results further confirm what we already knew: Current poor economic conditions will likely lead to widespread weakness in the semiconductor sector for at least the next few quarters. Chipmakers are unlikely to spend heavily on expanding their production capacity until they see signs of end-market demand picking up again in areas such as personal computers and communication equipment. Applied Materials' management estimated that equipment industry sales will decrease 20% in 2001, and it's any person's guess as to when a recovery will take place.

Jeremy Lopez does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.