Analysts at Citi Research maintained their conviction that Applied Materials, Inc. (NASDAQ:AMAT) is a top pick after announcing its merger agreement with Tokyo Electron Limited (TYO:8035) (OTCMKTS:TOELY), the third largest equipment maker.

Applied Materials

Applied Materials’ stock price

The stock price of Applied Materials, Inc. (NASDAQ:AMAT) rose by more than 9 percent yesterday to $17.49 a share. Today, the stock continues to trade higher and is up by more than 2 percent as of this writing.

Citi Research analysts Terence Walen and Atif Malik noted that the combination of the businesses of Applied Materials, Inc. (NASDAQ:AMAT) and Tokyo Electron Limited (TYO:8035) (OTCMKTS:TOELY), the first and third largest equipment maker, respectively, will result to a market cap of approximately $30 billion and about 31 percent market share based on a market analysis last year.

Estimation for earnings

Walen and Malik estimated that the combined company would generate higher earnings at $2.40 per share by 2017 on $37 billion WFE, 12 percent higher than the previous EPS target of Applied Materials, Inc. (NASDAQ:AMAT) at $2.17 per share. According to them, the projected EPS is driven by a $3 billion share buyback, $500 million in operating synergies, and 5 points lower tax rate from 22 percent to 17 percent.

Based on the preliminary pro-forma analysis of Walen and Malik, the C15 EPS of the combined company is $1.62, above their current non-GAAP EPS estimate of $1.37 and higher than the consensus estimate of Wall Street analysts at $1.55.

Merger of Applied Materials and Tokyo Electron

The analysts believe that the merger of Applied Materials, Inc. (NASDAQ:AMAT) and Tokyo Electron Limited (TYO:8035) (OTCMKTS:TOELY) is cost-driven and is well suited to the strengths of the CEO and CFO of the number one equipment maker.  They also believe that the merger reduces deal integration risks if it was driven by revenue synergy motive.

Walen and Malik noted that the combined company will concentrate on deposition and etch, but a limited product portfolio overlap exists, which could restrain reverse customer leverage.

In addition, the analysts noted that the combined company’s TSMC’s monthly bookings data showed that orders would increase to more than $1 billion in September. According to them, the acceleration is strong and supports their projected $10 billion TSMC capex. Walen and Malik expected that Applied Materials, Inc. (NASDAQ:AMAT) would be able to deliver strong foundry growth in the fourth quarter.

The analysts recommended a buy rating for the shares of Applied Materials, Inc. (NYSE:AMAT) with a price target of $19 per share.