3 Reasons Why Cowen Upgraded Applied Materials

Applied Materials, Inc. AMAT shares have taken a hit due to industry-specific issues, but Cowen is optimistic about the stock's future. 

The Analyst

Cowen analyst Krish Sankar upgraded Applied Materials from Market Outperform to Outperform and increased the price target from $60 to $62.

The Thesis

The recent pullback in Applied Materials shares is due to "near-term weakness in memory WFE and a reset in display equipment forecasts," Sankar said in the Monday upgrade note. 

Cowen's newly bullish stance is based on three factors, the analyst said: 

• Near-term weakness in memory is already reflected in the stock price. The company is likely to benefit from a potential rebound in memory WFE spending after the calendar 2018 third quarter.
• The reset in 2019 expectations for the display segment derisked estimates.
• With the stock trading at a 17-percent discount on a P/E and EV/EBITDA basis relative to its large-cap peer group median and a 22-percent discount to its three-year forward P/E, the analyst said the valuation is attractive.

As far as near-term and 2019 expectations are concerned, Cowen forecast for the company to hit the low end of the July quarter revenue and EPS guidance assuming a 12-percent sequential drop in semiconductor sales. Cowen forecast another 5-percent sequential drop in October.

Display sales are projected to decline 16 percent and 20 percent in 2019 and 2020, respectively, after 32-percent gorwth in 2018, Sankar said. 

"Nevertheless, the strength in semiconductor WFE should help AMAT grow its overall revenue and earnings in FY19 and FY20." 

The Price Action

Applied Materials shares have lost about 4 percent year-to-date. The stock was trading up 1.38 percent at $49.52 at the time of publication Monday. 

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Photo courtesy of Applied Materials.