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Nova Measuring Instruments (NASDAQ:NVMI) is an Israeli-based, semiconductor equipment maker with a hot new product that is gaining market share on competitors and securing additional clients via new contract wins. With $14M in cash on its balance sheet and a streamlined cost-structure in place, NVMI should return to profitability in Q309 and scale up its revenues and earnings throughout 2010-2011.

In early September, NVMI announced that its revenues for Q3 are expected to increase more than 40% sequentially over the Q2 results, due to an expanding backlog for its Stand Alone Optical CD system.

In July, NVMI’s advanced scatterometry modeling and analysis software, NovaMARS, was chosen as one of the 15 best products of 2009 by the editors of Semiconductor International. As customers focus on rapid migration to the next technology node, in order to maximize their existing capacity and control costs, NVMI’s NovaMARS modeling software is consistently beating out its competitors’ solutions. This is leading to increased market-share and a significant jump in orders.

Early last week, NVMI announced a breakthrough order from one of the world’s leading foundries. According to CEO, Gabi Seligsohn,

Winning the support of this particular customer, who is known as a technology leader and an industry benchmark, is of huge strategic value to the company. With this third major foundry win we further expand our reach into this growing segment, an area where most capital spending is expected to continue in the coming years.

The Globes, an Israeli newspaper, speculates this recent contract win is from IBM and may be worth up to $10M in revenues for NVMI in 2010. Based on CEO Seligsohn’s comments, NVMI seems to have positioned itself in the sweet spot of the current semiconductor equipment spending-cycle.

As revenues from these new contract wins come on stream, a greater percentage of these sales should flow directly to NVMI’s bottom line. Over the past four quarters NVMI’s management team has selectively cut expenses, careful to ensure product development and customer support efforts remained intact. These cost-cutting efforts began to pay big dividends in Q209. Though revenues were 37% lower than those in Q208, the company was still able to generate an impressive improvement in gross margins (GM), increasing them from 39% to 41%, respectively.

Looking ahead, this is a trend that should continue to improve. With higher GMs on new products and lower sales and marketing expenses, NVMI’s operating margins are poised to double the peak of the last semiconductor cycle.

Should NVMI be able to generate $60M in sales, 48% GMs, and OpEx of 38% in 2010, we could very well see earnings per share of $0.30-0.35 a share next year. If the company could ramp to $70M in sales by 2011, NVMI could show $0.50-0.60 a share in peak earnings.

We are continued buyers of NVMI on any pullback to the $2.50-2.60 price area in the coming weeks. NVMI is extended, and trades fairly thin, so be patient as a pullback in the stock seems overdue.

Disclosure: We are long NVMI for the accounts we oversee.

Source: Nova Measuring: Pullback Seems Overdue