3 Good Companies That Are Getting Even Better

Includes: CEVA, MLNX, UCTT
by: Shlomi Cohen

Three companies that I hold in my portfolio tracked by "Globes" reported excellent results last week, and it appears to me that all three will continue on their journey upward to new annual records.

The three are US company Ultra Clean Holdings (NASDAQ:UCTT), and Israeli firms Ceva Inc. (Nasdaq:CEVA) and EZchip Semiconductor Ltd. (Nasdaq: EZCH).

Ultra Clean is a subcontractor company that assembles very complicated systems for companies with unique technologies, and I found that through the company I can invest in specialized fields at low multiples.

Ultra Clean is known primarily because it builds all the surgical robots for Intuitive Surgical (NASDAQ:ISRG), a company with a $13.5 billion market cap, which at a price of $330 per share reflects a P/E ratio of 32 for the year forward, and a sales multiple of over 10 for the past twelve months. Immediately after Intuitive Surgical's results, and before Ultra Clean's, "sophisticated" investors sold about a million Ultra Clean shares short, because they believed that the temporary slowdown-- which Intuitive reported for the second quarter-- would affect Ultra Clean.

In actuality, Ultra Clean's results and guidance were much better than expected, because it turned out that assemblies for companies in other sectors, primarily chips, grew strongly, and more than made up for a slowdown at Intuitive. For the week, Ultra Clean shot up 17%, among other reasons because of a short squeeze, and even at a yearly high of around $11, the share remains with an attractive price to earnings ratio of less than 8 based on 12-month forward earnings, and a sales multiple of less than 1 for the previous 12 months.

On the other hand, it should be remembered that in a recession, shares like this collapse quickly, as happened in the beginning of 2009.

Investment house Needham, which collaborates in Israel with Clal Finance Ltd. (TASE:CLFN), recommends Ultra Clean with a "Buy" rating and target price of $15.

Ultra Clean has advanced assembly facilities in Singapore and Shanghai, and in China it will build for Orbotech Ltd. (Nasdaq: ORBK) in large quantities, beginning in the fourth quarter and through all of 2011, inspection systems for LCD screens. Orbotech's results released this week seem to show that 2011 should be a very strong year for it in this niche, because of expectations for many television factories to be built in China, for many of which it will supply the inspection systems.

Ceva, like Ultra Clean, beat and raised guidance, and with each quarter that passes it provides investors increasing confidence that its goal of reaching $1 earnings per share within 2-3 years is very realistic.

Ceva sells intellectual property (IP) in return for licenses and royalties for DSP processors for the mobile handset market. It has a 29% market share in that sector, and is present in Apple's (NASDAQ:AAPL) iPhones and iPads, Nokia's (NYSE:NOK) devices, Samsung's (OTC:SSNLF), and others.

According to the Wall Street Journal, major Ceva customer Infineon (IFX) is in advanced negotiations to sell its wireless processors division to Intel (NASDAQ:INTC). The acquisition would return Intel for the second time this decade to being a supplier of communications processors to the cellular market, after it sold its DSPC unit to Marvell Technology Group (Nasdaq: MRVL) in 2006.

The icing on the cake with the deal, for Intel, is to get, through the communications processors, into iPads and iPhones, a place where it currently is not found. From Ceva's point of view, if the deal comes to fruition, it would be a major upgrade because it turns it into the DSP supplier to Intel.

EZchip also beat forecasts for the second quarter, and provided guidance for continued growth in the third quarter compared with the second quarter.

EZchip has an Israeli competitor, Wintegra, which is very near a Nasdaq IPO, and is in a niche of Internet access processors, a market EZchip will enter full force only next year. I have already previously pointed out that I know from very reliable sources that in late 2009 EZchip offered to buy Wintegra and merge the two companies. The combined company could have been a miniature local empire in the Internet processor sector.

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

Published by Globes [online], Israel business news - www.globes-online.com - on November 17, 2009; Reprinted on Seeking Alpha with permission
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009