Earnings season is upon us, and during earnings season we peruse through hundreds of press release to identify clues about company economic outlooks. So far on the U.S. front, the results for the companies we track have been impressive. We are intrigued that the commentaries in press releases and conference calls have not echoed the gloom and doom portrayed in many of the economic statistics. This type of dichotomy is not the easiest to navigate and the decisions you make mostly depend on who you choose to believe.
Let’s look at a few companies that have issued amazingly strong financial results and positive guidance over the past two weeks.
We like to monitor industry leaders. TER is the leading "supplier of Automatic Test Equipment used to test complex electronics used in the consumer electronics, automotive, computing, telecommunications, and aerospace and defense industries."
On July 28, 2010 TER announced earnings that blew away analyst estimates.
2010 second quarter results:
- Revenues increased 37.97% to $455 million.
- On a non-GAAP basis, second quarter EPS was $0.69 vs. $0.33 for the first quarter of 2010, a loss of $0.21 for the same quarter last year. and an analyst estimate of $0.47.
Guidance for the third quarter of 2010:
- Revenue of $490 million to $520 million vs. $262 million in the previous year.
- Non-GAAP net income per diluted share of $0.75 to $0.83 vs. $0.04 last year and analyst estimates of $0.46 at the time of the release.
Press release Comments were remarkably bullish:
We delivered our highest earnings in a decade in the second quarter driven by continued revenue and order growth in Semiconductor Test, and are poised to surpass that mark in the third quarter," said Mike Bradley, Teradyne president and CEO. “We’ve reached new order highs for all of our System-on-a-Chip (SOC) test products, continuing our market share gains of the last few years.
The 2011 challenge: Despite this performance, 2011 estimates show the company’s EPS growth declining 6.8% to $2.20.
Important observation: You need to go all the way back to 1999 to discover revenues that matched the company's 2010 $1.7 billion revenue expectations. The year 1999 was near a peak cycle of economic activity!! We can all agree that the current economic activity has not peaked.
NANO's high-performance process control metrology systems are used primarily in the fabrication of semiconductors, high-brightness LEDs, data storage devices and solar photovoltaics.
With 2010 second quarter non-GAAP EPS of $0.60, NANO crushed analyst EPS estimates of $0.27, when it reported its best quarter in 35 years and fifth quarter of sequential margin improvement.
This was Nanometric's first $50 million quarter, exceeding its prior record revenue quarter by over 30%. Also notable were its pre-tax margins of 25%, a level we rarely observe in U.S. firms.
The earnings press release did not provide specific details on management’s future business outlook. Consequently, we listened to the earnings conference call to determine if management would give investors a glimpse of what could be in store for the next few quarters and its view on economic activity.
Echoing the sentiment of other companies that participate in the technology semiconductor sector and contrary to economic statistics, NANO expressed extreme optimism in the growth outlook of its markets.
- Driven by global demand, the information technology, electronic device and digital content markets are strong, leading to huge growth in chip demand.
- Leading chip companies are aggressively investing to meet this demand.
- Order flow from its two largest customers, Intel and Samsung, is strong.
- New customer activity from second tier companies is coming online.
- North America and South Korea markets are particularly strong.
We were very impressed at management’s ability to communicate and exceed its growth objectives set in 2009. We also found it significant that customer lead times are shortening up, meaning they want the product faster.
One thing investors need to be aware of is that a majority of NANO's sales come from two customers, although the company did mention that it is making positive inroads to diversify its customer base.
In a June 8, 2010 press release, the company reaffirmed its business outlook:
I believe the current business environment is extremely healthy, and the positioning of our Company’s products is the strongest in Nanometrics’ history,” commented Dr. Timothy Stultz, Nanometrics’ president and chief executive officer. “Our business outlook is strong, both in the near term and in the longer term, and is continuing to improve. The technical capabilities and expected fan-out of business for our Atlas® thin film/optical critical dimension (OCD) platform with key customer accounts are tracking nicely and in fact are exceeding prior forecasts, leading us to reaffirm our strong business outlook for 2010 and 2011.
As far as future outlook, NANO was not specific, but commented that the second half of 2010 will be stronger that the first half (where it reported non-GAAP EPS of 0.69) and barring external economic events, also sees growth continuing in 2011. This should ensure that the company will beat its 2009 second half non-GAAP EPS performance of $0.23. Please note that the stock has risen sharply since the release of its financial results.
The 2011 challenge: At $1.69, 2011 analyst estimates translate to EPS zero growth. Although, EPS for each of the next three quarters are expected to grow significantly.
AXTI manufactures and distributes compound semiconductor substrates to companies involved in sectors such as the wireless devices, LEDs and photovoltaic markets.
AXTI reeled in a strong 2010 second quarter:
- Revenue for the second quarter of 2010 was $23.2 million, compared with $18.6 million in the first quarter of 2010, and $13.1 million in the second quarter of 2009.
- Non-GAAP EPS was $0.13 per diluted share compared with $0.08 per diluted share in the first quarter of 2010, and with a loss of $0.05 per diluted share in the second quarter of 2009.
Analysts had been expecting the company to report EPS of $0.08. This is the second quarter in a row in which AXT has easily exceeded analyst estimates. The company will aim to make it three in a row and has guided for 2010 EPS of $0.12 to $0.14.
Per the conference call, the company:
- Is benefitting from an explosion in the smart phone and the ramp up of LED technology.
- Will benefit from the continual and often upgrades in smart phone technology for LED TVs, signage, display and general illumination.
- Will benefit from the major evolution on how data is managed and consumed.
- Believes demand trends driving its business model are long term and significant.
- Supplies to virtually all major smart phone companies through its broad base of customers.
- Has the ability to add capacity quickly.
The 2011 challenge: 2011 analyst estimates have the company’s EPS growing only 12.0% to $0.56. Although, EPS for each of the next three quarters are expected to grow significantly.
Important Observation: We don’t believe that analysts have factored in new product contributions that could impact the second half of its 2011 fiscal year.
Amtech Systems (ASYS)
ASYS is engaged in the manufacture of several items of capital equipment used by customers in the manufacture of semiconductors.
ASYS handily exceeded fiscal 2010 3rd EPS qtr estimates $0.28 when it reported EPS of $0.42, reversing a prior year loss and easily surpassing its three year high of $0.17 reported in the 4th quarter of 2007!
Revenues increased 243.8% to $43.0 million, almost eclipsing the entire fiscal 2009 number of $52.9 million. Pre-tax margins were 14.4%. On it’s conference call, the company stated that is experiencing strong order trends from solar and semiconductor customers and confirmed the improving trend in the technology sector, a sentiment that other companies have shared. Furthermore, visibility has improved, leading the company to assert that demand is promising well into 2011. The company also gave us a peak into the health of the Chinese economy as over 90% of its revenues are derived from China.
The 2011 challenge: While fiscal year ending September 2011 estimates have EPS pegged to grow 62.2% to $1.33, the back half of 2011 is expected to show weak growth. Although, EPS for each of the next three quarters are expected to grow significantly.
Important observation: We don't believe that analysts have factored in new product contributions that could impact the second half of Amtech's 2011 fiscal year.
We have also begun to track Micronetics (NOIZ) and Magic Software Entrs (MGIC) due to recent strong EPS outings. Both companies have had inconsistent growth stories and will require interviews to determine if growth is ready to take on a new level. Blonder Tongue Labs (BDR) is also a promising non-tech firm, with an inconsistent past, we are currently tracking right.
EPS growth in 2010 is benefiting from easy 2009 comparisons. The challenge in many of the above scenarios is that EPS growth will be hard to come by based on 2011 analyst estimates. This can cause investors to approach an equity investment on a quarter by quarter basis as opposed to making a longer term decision. This is one reason why we find ChinaHybrids an exciting option as they have the ability to sprout consistent EPS growth, as long as dilution from fund raising activities does not get in the way.
Due to mixed economic signals, it is understandable that many analysts are likely being conservative on their economic growth assumptions by not including new customer/product trends in their estimates. If we experience any uptick in economic activity, the success many of these companies can reach new heights.
Overall, we think analysts will continue to play catch-up with regards to U.S. companies, especially in the tech sector as the economic recovery sparked by the smart revolution gains steam. We are even actually wondering if there is a mini type dot com undercurrent building.
Despite some of the EPS growth hurdles that analysts hint many U.S firms may face in 2011, the outlook for many ChinaHybrids tells a different story. As 2011 rolls in, the EPS growth is set to gain steam after a lull in 2010 that was caused by dilution. As the market usually proceeds events 6 months in advance, is now the time to begin seeking these opportunities?
Ideally, we would like to identify firms that will show positive growth in both 2010 and 2011. Many firms may have laid out clues that the near-term outlook remains strong. So far, a good deal of ChinaHybrids have issued bullish 2010 second quarter financial results, which we will publish details on shortly. We will also publish details on our SAIC due diligence.
Disclosure: Long TER, ASYS, NANO, AXTI, NOIZ, MGIC, BDR