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Updating IT systems at organizations, which mostly involves personal computers, many of them laptops, can only be good for chip companies. That is why I prefer this week's recommendations of Credit Suisse on the chip sector in the upcoming year, over the more negative remarks last week by Bank of America. Credit Suisse recommends suppliers of DRAM and NAND memory chips, specifically, Samsung (OTC:SSNLF), Toshiba (OTCPK:TOSBF), and Micron Technology (MU).

In that regard, I am adding Nova Measuring Instruments Ltd. (NVMI) today, to my portfolio tracked at "Globes". Nova is a small Israeli firm that supplies metrology systems for measurement for the chip sector.

I believe that this year Nova will enjoy a recovery in orders, specifically in this sector memory chips. It should be understood that in 2007, investments in this field totaled $35 billion, and in 2009 will reach only $8.5 billion, because of the economic crisis.

According to Credit Suisse, investments in production lines for memory will grow 60% next year to $13.6 billion, which is still only 40% of the 2007 level.

While Nova shares are currently about 9 times higher than their low of the beginning of the year, what is important for every share is what the company is going to do in the future, not what it has done until now. The low in February of this year represented a fall as in off-a-cliff of orders from chip makers in 2008 and in the beginning of 2009. Nova was no exception as the entire sector suddenly came to a halt. However, because it is a small company, Nova slid to a heavy operating loss of 29% of sales in the third quarter of 2008.

In contrast, the dramatic recovery in orders during the second quarter of this year, which showed up in the third quarter's operating profit of 13% of sales, was a story unique to Nova, which will continue, in my estimation, for many quarters, unless the world enters a second crisis.

What happened in the spring was wonderful timing on one hand, the world's largest chip maker, Taiwan's TSMC (TSM), was hit by a major obstruction in its production lines at the height of the process of lowering device geometries, and on the other hand, Nova brought to market an advanced measuring system meant to solve those exact problems.

Lowering device geometries is the soul of chip makers, because it lowers expenses very much. For example, 32 nano production can produce nearly three times the number of chips from the same piece, as 45 nano production.

Nova came out with a measuring system which costs the customer about $1 million, in contrast to other systems which cost four times as much. TSMC was quick to order $15 million worth, and is expected to order more this year and next.

TSMC recently reported an aggressive investment plan for 2010, to include massive growth of its production lines, not just improving processes.

According to Gartner, Nova will reach 31% market share this year in this niche market, compared with 4% two years ago, when the first model reached the market. Nova has a second line of consolidated systems, where Gartner claims the company leads with a 68% market share as of 2008.

Productivity improvements during the crisis brought the company excellent results in the third quarter- $11.4 million revenue and gross profit margin of 48%. These results should continue in upcoming quarters in light of its customers' investment plans, so in my estimation, priced at around $3, with a market value of $60 million, shares are still very cheap.

Disclosure: Author holds shares as part of his portfolio tracked by "Globes".

Source: Niche Player Nova Rides Chip Production Recovery