Semiconductor equipment giant Applied Materials (Nasdaq:AMAT) is a frustrating name in many respects. Nobody disputes that AMAT is a leading name in the equipment that companies require to manufacture semiconductor, LEDs, flat panels and solar films. On the other hand, while the company's revenue and cash flow base has chopped upwards, the stock has yet to break out of a ten-year downward trend. That makes this stock a challenging trade-off between quality, valuation and sentiment.

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A Solid Start to the Fiscal Year
At least AMAT is getting this fiscal year off to a decent start. Revenue rose 45% from last year, but dropped about 7% from the prior quarter, and beat the average analyst guess. The underlying revenue mix was a bit more volatile; the company's core semiconductor business was up slightly, while the display and solar businesses fell off sequentially.

Profitability was not bad. Gross margin (on an adjusted basis) stayed sequentially consistent, as did the company's operating margin. That's not given that it is not at all uncommon for companies like Applied Materials to see a sharper falloff in profits on lower sequential revenue.

The company's order picture was relatively sound as well. Orders in the semi business did drop sequentially, but the book to bill ratio was solidly above one - not altogether surprising given the announced fab plans from companies like Intel (Nasdaq:INTC), Taiwan Semiconductor (NYSE:TSM), and Samsung. Elsewhere, orders in display were down but close to a book to bill of one, while orders in energy and environmental were up about 22% sequentially.

The Road Ahead
At this point, it is looking like the semi equipment space is shaping up for a pretty decent 2011, with more strength in the latter half of the year. Following the line of thought that what is good for Applied Materials is good for the sector, encouraging guidance from AMAT should be good news for the likes of ASML (Nasdaq:ASML), Novellus (Nasdaq:NVLS) and Lam Research (Nasdaq:LCRX). Along similar lines, a better outlook for capital spending in the LED market would be good news for the likes of Nanometrics (Nasdaq:NANO) and Aixtron (Nasdaq:AIXG).

On a longer term basis, it seems like Applied Materials has reached a point where it has a good moat around its business, but the nature of the industry itself means investors are in for consistent inconsistency. In other words, Applied Materials seems more than likely to continue growing with (or slightly above) the overall customer growth, but the company's attempts to branch into LEDs, thin film, solar and so on have really not changed the cyclicality of the business.

The Bottom Line
Applied Materials shares look cheap enough to be interesting, but the rebound-off-the-bottom trade is over. That means potential investors have to make their peace with the volatility of the industry, the company and the stock. That's not an easy decision to make, nor one to take lightly - cheap is only valuable if an investor has the patience to put up with the resolution of whatever made the stock cheap in the first place. (For related reading, also take a look at Patience Is A Trader's Virtue.)

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Tickers in this Article: AMAT, ASML, NVLS, AIXG, LCRX, NANO, TSM

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