Rudolph Technologies (RTEC) has had a choppy 2013. Shares closed Friday at $10.38 and are down nearly 40% from the beginning of the year sitting just above the year low.
Revenues for 9 months 2013 compared to 9 months 2012 were down about $32M. According to management, on the Q3 CC, this can be chalked up to a downturn in spending from Asian manufacturers of high-end smartphones and tablets and a general slow down in the high-end mobility market over the summer leading into typically slower Q3 and Q4 periods for back-end outsourced assembly contracts. Based on developing industry trends, competitive position, and 2014 consensus earnings estimates I believe Rudolph Technology shares are currently mispriced and selling at a 40% discount to fair value.
Rudolph Technologies designs, develops, and manufactures equipment and software for defect inspection, process control, metrology (measurement), and data analysis systems and software used by semiconductor and microdevice manufacturers worldwide. At a high level, Rudolph's business is composed of the following main units:
4. Lithography (circuit patterning a.k.a. wafer shooting)
5. Data Storage/Memory
Rudolph separates the business into segments, (1) Front-End - think of this as inspecting the incoming silicon wafers for defects through each front end application and (2) Back-End - think of this as inspecting the silicon wafers after the circuitry has been printed onto the wafers, the chips have been attached, and eventually debonded.
The idea being to reduce defects and costs while increasing efficiency and yields using Rudolph's high-tech inspection tools, processes software, metrology (super accurate measuring), testing, and analysis. Suffice to say the process is more complex than described but for the purpose of this introduction you get the gist.
Rudolph sells equipment, software, and services to large foundries such as Intel (INTC), Samsung (OTC:SSNLF), and Taiwan Semiconductor (TSM). They also serve fabless customers, memory and other microdevice manufacturers. Rudolph's business tracks the semiconductor "Book to Bill" ratio, which is a loose measure of semiconductor demand. So the higher the demand for the semis generally means higher demand for Rudolph's products which means higher revenues.
Currently Rudolph is trading at $10.38 or about 15 x 2014 consensus EPS (.69) - comparable industry peers trade at a smoothed average of 21 x forward estimates. I believe Rudolph will migrate to the industry average over the next couple of quarters, which would take the share price to $14.50 range. I also believe this may be conservative as several factors could drive the consensus estimates higher for 2H 2014 (I'll get to those shortly). Current analyst 12-month price targets range from $11.50 - $16.00 with the mean at $13.70. Consider also that Rudolph is sitting on $158M of cash or $3.71 per share as of the Q3 CC. They are also cash flow positive and sport better than 50% gross margins.
The Chairman and CEO, Paul McLaughlin, confirmed at the Q3 CC that an unfavorable legal decision against Rudolph by ITC has been appealed successfully and reversed:
Before I start, I want to call your attention to the fact that we issued 2 press releases this afternoon. The second release was a ruling issued this morning in Rudolph's patent infringement case, brought by ITC, wherein the judgment reverses at least $23.4 million in damages in favor of Rudolph.
The Chairman and CEO also added that they felt the market was firming up:
Our 2013 business model shows front-end solutions accounting for just over half of our revenues of specifically, 55% of our top line. We have been very pleased to see the recent strengthening of orders for our front-end metrology solutions for 3D FinFET NAND flash memory technology at 20-, 16- and 14 nanometer nodes. We believe this front-end activity signals a restock of our industry's front-end growth trajectory and gives us increased confidence for the 2014 year, after the pause experienced in the last couple of quarters.
Rudolph's also has a majority position in the market and has been gaining market share - below is a slide from an August 2013 company presentation showing the latest YOY market share comparisons:
Source: Rudolph Technologies August 2013 Investor Presentation
Rudolph has also entered Advanced Packaging Lithography (AP Litho). As consumer devices get smaller, thinner, and more powerful they require new semiconductor technologies such as 3D, TSV which in turn require new and advanced solutions like AP Litho - again think Micron's Hybrid Memory Cube or Samsung's vertically stacked NAND chips. The AP Litho industry, as a whole, is projected to grow at 35% CAGR.
The main risks that Rudolph faces (catastrophe notwithstanding) are garden variety: Competitive threats, decreasing high-end consumer electronic sales/semiconductor slow down, or misfiring on their execution. These risks are always part of a normal operating environment and don't seem likely to be elevated in 2014. Competitively, as the slide above shows, they have been gaining market share.
Rudolph Technologies has had a challenging 2013 and has still been able to maintain higher than 50% gross margins, stay cash flow positive, and keep over $158M of cash on hand as of the end of Q3. Company guidance for Q4 calls for revenues being flat to +5%, EPS non-GAAP in the $.04 - $.07 range and a slight increase in operating expenses due to some employee restructuring in Q3 that will be recorded in Q4. The shares look compelling in the $10 range especially with a safety net of $3.71 per share in cash. The low $10s appear to be solid support as it has bounced twice in that area and looks to be forming a double bottom. I like Rudolph's prospects moving forward into 2014 and I certainly like how as the semiconductor/memory industry advances and evolves so does the need for Rudolph's solutions. Rudolph's shares have a history of rising in December as you can see in the graph at the top of the page. If purchasing shares today I would give this thesis at least 2 quarters to come to fruition.
Additional disclosure: This article is informational and intended to spur thought and discussion. This article is NOT a substitute for your own extensive due diligence and does NOT qualify as investment advice. DO NOT BUY OR SELL STOCKS BASED ON THIS ARTICLE.