Recent Pullback In Applied Materials 'Offers An Attractive Entry Point'

In a report published Wednesday, Deutsche Bank analysts maintained a Buy rating on Applied Materials Inc AMAT, with a price target of $30, ahead of the close of the merger with Tokyo Electron TOELF. Applied Materials' shares have declined about 10 percent since the beginning of this year. The pullback was on concerns surrounding slower WFE spending. Despite this being an overhang on the company's performance this year, "the industry spending trends on technology inflections over the next few years are unchanged," the analysts said. Applied Materials is a "self-help story" and the pending merger with TEL offers "compelling synergies and earnings accretion potential," the analysts believe. In the report Deutsche Bank noted, "Recent comments from Intel, TSMC and SanDisk suggested that there is a downward bias to capex budgets across all customer segments this year. We also expect semi companies to issue softer guidance on macro/currency concerns in the next few weeks. While we agree there are risks to near-term estimates (~$0.03 of EPS for every $500mn of WFE spending), we believe it is just delaying the inevitable, as technology challenges that the semiconductor industry faces are not getting any easier to solve." Although there are limited updates on the pending AMAT/TEL merger, it seems to be making progress. The PF EPS estimates for 2016 and 2017 have been reduced from $2.00 to $1.92 and from $2.40 to $2.23, respectively, "largely due to the timing of the [merger] close, a change in currency exchange rate and small amount of divestitures." The analysts continue to expect Applied Materials to generate an EPS of more than $2.40 "when cost synergies are fully baked in."