Applied Materials management is known to execute well. When flash technology is hot, the Company performs well, and when logic technology or demand for foundry chips runs cold, the Company performs less well. Right now, the logic/foundry chip market has gone soft.

But by the 2H07 period, all markets for Applied Materials are expected to recover, and so too will the price of AMAT.

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The UBS research team is maintaining a Neutral rating on AMAT because Applied Materials management is guiding softer semiconductor capex for at least the next nine months. Download UBS Aug 16 AMAT report.

The 12-month price target for AMAT is set at $18.00 by UBS, which is an 18 PE multiple applied to (no pun) an estimate of $1.00 Earnings Per Share this current fiscal year.

But let's say the Company earns $1.25 in 2007 and the market applies a 20 PE, then a fair value would be $25 next year. In a strong Bull market, it could be say ~10 pct higher, say $27.00 to $27.50.

The stock is presently $15.69, which is about 17.2 PE on trailing earnings, and probably 14.8 times earnings with the current quarter factored in. With any serious weakness, the stock could fall to maybe $14 (13.25 PE times $1.06 est. current earnings).

If we bought at $14 and wrote some puts with a lower strike price and factored in the $0.20 dividend that will likely be paid in the following four quarters, our cost base is likely to get into the $13.50 range.

Now, if the economy strengthens in 2H07 and 2008, what with discounting future earnings and all, we'll likely see that $27.00 price for AMAT in 2H07.

So, if my cost is $13.50 and my target is $27, then I am seeking a +100 pct gain. Even if I have to wait two years or (heaven forbid) three, I am one happy camper. I can sit back, secure in the knowledge that the management team is solid, the product line is solid, the balance sheet is solid, and some blogger has the Company rated in his Global Best 100 Companies list.

Slam dunk.

Or in other words, there will soon be a time when this chip doesn't dip any more.

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Applied Materials Inc [GICS 45, Cara 100]
(AMAT: Yahoo Finance file)
(AMAT: StockChart chart)
(AMAT: Investertech chart)
(AMAT: ADVFN Financial Data)
(AMAT: ADVFN Financial Data)

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