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Monday, August 28, 2006

JPMorgan Scalps Applied Materials

Stocks: (AMAT)

JPMorgan recently cut that shares of Applied Materials which creates equipment used to make microchips from “overweight” to “neutral”. Odd, because the company is doing so well.

Applied Material just announced a quarter in which it net rose from $370 million a year ago to $512 million. Revenue was up 56% to over $2.5 billion. According to the company, new orders were up 82% to almost $2.7 billion. MarketWatch, quoting SEMI, the industry trade group, said that chip equipment rose 60% in the second quarter to $12 billion. It also said that Applied Materials expects its target market to rise to $37 billion in 2008 from $20 billion in 2004.

Applied Material said that its next quarter would be fairly flat .Chip equipment sales may not expand much in 2007.

Even if Applied Materials growth has slowed somewhat, it valuation had dropped considerably before the Morgan downgrade. The company’s stock is down from a 52-week high of over $21 to just above $16.

As Morningstar pointed our in its most recent report on Applied Material, the company is by far the leader in its industry: “The firm has the broadest product portfolio and offers customers the closest thing to a one-stop shop.” Morningstar has a fair market value of $20 on the company, and does not suggest selling it until it reaches $21 which is its high for the last year.

As chip inventories increase, it is fair to argue that Applied Materials has a limited chance to grow near-term. But, with chip demand rising longer term, the company is more likely to prosper than almost any in the industry.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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