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Tickers in this Article: AMAT, ASML, HPQ, BBY, TSM, NVLS, LRCX, TXN, HGG, DELL, INTC, KLAC
One of the frustrating parts about following semiconductor and semiconductor equipment stocks is that no two cycles are exactly alike. Right now, Applied Materials (Nasdaq:AMAT) is in a place where the industry is still trying to find the bottom in orders, and companies like ASML (Nasdaq:ASML) have started to suggest that orders will bottom out to maintenance levels late this year or early next year. Applied Materials looks cheap, but it did a quarter ago and the quarter before that, and investors may want to wait for signs of stabilization in orders before taking the plunge.

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A Solid Third Quarter ... Sort Of
Applied Materials has been in a weird place for a little while now, lowering order guidance and yet still managing to do a little better than it leads investors to expect. So, too, again this time. Revenue fell 3% on a sequential basis (and rose 11% year over year), enough to beat the average estimate by $100 million and the high end of the range by $50 million. Business was relatively balanced, with the large Silicon Systems category down about 4% sequentially.

Profits weren't too bad either. Gross margin ticked up a full point from the Q2 and jumped about 7.5 points from last year. That's impressive in an industry where margins are so often beholden to revenue. Operating performance was solid as well - operating income rose 1% on a sequential basis, as Applied Materials continues to show better profitability through this down cycle. All of that said, investors should keep in mind that expectations have been moving down, so the company is jumping a shorter hurdle.

Guidance Looking a Bit Kitchen Sink-ish
It looks like the semiconductor industry is heading toward a winter of discontent. Hewlett-Packard (NYSE:HPQ) and Dell (Nasdaq:DELL) have been reporting very mediocre PC demand, Best Buy (NYSE:BBY) and hhgregg (NYSE:HGG) aren't moving many TVs, and consumer electronics lacking the Apple logo are stagnating on store shelves.

As investors may have noticed, this is filtering through the chip companies like Intel (Nasdaq:INTC) and Texas Instruments (NYSE:TXN), as well as the foundries like Taiwan Semiconductor (NYSE:TSM). With demand so weak, particularly in DRAM, foundries are cutting back their equipment orders, and Applied Materials saw orders drop 25% this quarter.

It's not just about the stressed-out consumer, though. Orders for equipment used to make solar panels dropped 48%, as this industry continues to struggle.

Probing the Bottom?
Investors interested in semiconductor equipment should pay attention to what Novellus (Nasdaq:NVLS) has to say next week, as well as comments from other rivals like KLA-Tencor (Nasdaq:KLAC) and Lam Research (Nasdaq:LRCX). Sure, these companies have different exposures in terms of front-end and back-end, foundry and non-foundry, but the idea is that all of them are facing more or less the same industry environment. What's more, companies have been making comments indicating that they think the worst will be over around the start of 2012.

In terms of valuation, Applied Materials is approaching a price/tangible book value that investors haven't seen since early 2009. This is not the normal way to evaluate these companies, but it comes up when cycles are near their bottom.

The Bottom Line
Yes, Applied Materials looks cheap, just like it has for a while now. And yet, so long as orders continue to slide, so too likely will the stock. Still, it is hard to ignore that the stock is trading at multiples that are about as low as they get. What's more, this is the 800-pound gorilla in the chip equipment space, and unless the world breaks out in a spontaneous burst of Ludditism, there will be plenty of demand for electronics, chips and chip-making equipment over the coming years. (For additional reading, check out A Primer On Investing In The Tech Industry.)

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