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Applied Materials' stock to reach $33 in medium term

Applied Materials, the world largest manufacturer of equipment for semiconductor industry, recently announced solid financials for its fiscal 2016 third quarter ended July 31. Revenues increased 13.3% y-o-y to $2.82 bn, in line with consensus estimate. The improvement was primarily driven by strong demand in Southeast Asia, Korea, Japan and China, which was partially offset by soft demand in Taiwan, Europe and the US. The company witnessed strong surge in the orders in this quarter, which were up 26% to $3.66 bn, the highest in any given quarter in the last 15 years. Backlog grew 60% to $4.95 bn. Adjusted operating margin expanded 200 basis points to 22.8%, and adjusted earnings per share came in at 50 cents beating analysts’ average projection by 3 cents.

Applied Materials exited FQ3 with cash and short-term investments balance of $3.27 bn (up from $2.64 bn in the prior quarter) and long-term debt of $3.34 bn (flat q-o-q). During the reported quarter, the company generated $981 mn in cash from operations, spent $50 mn on capex, paid dividends of $108 mn and used $196 mn to repurchase 9 mn shares.

Applied Materials also provided solid guidance for the fourth quarter of fiscal 2016. Revenues are expected to increase 15-19% sequentially, and non-GAAP EPS is forecast in the range of 61-69 cents.

I expect shares of Applied Materials to continue growth, with medium-term target at $33.