inTEST (INTT) will be reporting its 1Q 2010 earnings today after the close and will have a terrific outlook – the questions are 1) just how good? and 2) will it matter? If the outlook is as strong as I anticipate (and the Chairman appears to anticipate), shares would seem to have dramatic upside from here - trading at just 3x my 2Q annualized run rate earnings.
Last Friday (May 7th), INTT put out a press release indicating Executive Chairman Alyn Holt was entering a 10b5 program to periodically sell shares. Usually when I see a 10b5 I head for the hills since “diversification strategy” is typically a euphemism for “my stock has peaked” or “we’re going to miss in the not too distant future.” However in this case the filing indicated the sales would only commence when shares hit $8.00 – more than a double from current prices. I don’t recall having seen that before (if you have, please let me know).
inTEST is a micro-cap stock, but a micro-cap with large global customers including Analog Devices, (ADI) Texas Instruments (TXN) and Teradyne (TER) to name a few. The company was founded in 1981 and primarily designs and sells equipment used in the final test of semiconductors and wafers (the company also has some business outside the semiconductor segment).
inTEST recently pre-released its results for 1Q 2010 with revenues of $9.5mn and EPS of $0.11, up from 4Q 2009 revenues/EPS of $8.4mn/$0.04 (officially it was $0.01, but that includes a $0.03 restructuring charge). 1Q EPS was up $0.07 sequentially on a $1.1mn increase in sales. Management noted in its 4Q conference call, that’s its product mix had some relatively lesser margin business, so some of the EPS improvement could be attributable to mix, but most is due to higher sales and stable op-ex (management noted op-ex stability in its release and 4Q call).
Importantly, in its press release, INTT essentially provides 2Q revenue guidance. The company notes 1Q bookings of $14.0mn. In its 4Q conference call (a worthwhile listen only 20 minutes long, with questions from a sole buy-side analyst) management comments that while they don’t provide official guidance, previous quarter bookings are a good proxy for the following quarter’s revenue (1Q for example had revenues of $9.5mn versus 4Q bookings of $9.4mn). Thus, $14.0m is a pretty solid of estimate of what 2Q revenues will look like. Management indicated (on the 4Q call) that the reinstatement of salaries increases and 401k matching will increase quarterly op-ex by about $150k beginning in 2Q, but other than that, “at this point, we are confident we can continue to satisfy customer demand levels with a significant addition of overhead.” (from the recent press release).
If EPS grew $0.07 sequentially on $1.1mn on incremental sales, what might it grow on $4.5mn? Given the 1Q benefit from richer mix and the at least $150k ($0.015) higher op-ex, I think realistically we could anticipate at least an incremental $0.20 of earnings, although even higher seems reasonable (there ought to be manufacturing efficiencies, for example) – especially in light of the Executive Chairman’s planned sale price.
If one annualizes my 2Q EPS of $0.31, shares are currently trading at 3x forward – cheap even in a world where KLIC and TER are cheap (at least on forward multiples). Notably, management commented in its press release that at this point, they anticipate incremental business later this year in the automobile and medical fields.
INTT faces the significant cyclical risks that are experienced throughout the semiconductor industry. Additionally, INTT has a smaller scale than many of its industry peers.
Disclosure: Long INTT