Update: Orbotech Reports Strong Q2 Results - Revenue Up 8%, EPS Up 25% Q/Q

| About: Orbotech Ltd. (ORBK)


ORBK reported strong results with sequential revenue and EPS growth. The acquisition execution and the performance of SPTS Technologies under ORBK will be the areas to watch.

I reiterate my long thesis and raise the target price to $18 per share. ORBK offers a ~17% upside within a year and a ~10-15% annual upside afterwards.

The long thesis has worked extremely well. The target price was hit very precisely, delivering a ~45% return in under a year. Recent ORBK pullback offers an attractive entry point.

Orbotech, Ltd. (NASDAQ:ORBK) reported strong results for the second quarter of 2014 (SEC filing, earnings call, press release). The company delivered revenues of $113.2M, up 8% Q/Q and 4% Y/Y. GAAP EPS was $0.20, compared to $0.15 in Q1 and $0.24 a year ago. Operating cash flow was $11.6M. In terms of segments, the PCB business picked up as expected and the FPD business enjoyed another quarter of solid orders. Service revenues continued to strengthen. The company is very well positioned to benefit as ORBK's customers prepare to build new production capacities for the expected next generation of smart devices and small to mid, ultra high definition displays. For the second half of 2014, ORBK alone guides for organic sales of $260M, of which $118M to $123M should be delivered in Q3. The acquired SPTS should contribute roughly $100M in the second half of the year.

The previously announced major acquisition of SPTS Technologies is part of ORBK's strategy to expand into advanced packaging, representing a natural extension of its current business into an adjacent, fast-growing segment. Until now, the company performed strong share buybacks to deliver shareholder value. However, since August 5, the buybacks will cease and ORBK will instead deliver value through the growth delivered by this large acquisition. A new capital allocation policy is expected to be announced by mid-August as per the agreement with the activist investors.

My Orbotech long thesis worked extremely well and my price target of $16.73 was very accurate. The stock hit that region a month ago for a gain of ~45% in under a year. ORBK pulled back a bit in the last month amid broad market jitters and the small-cap sell-off. The recently announced large acquisition of SPTS Technologies and the associated borrowing, as well as activist investors pose specific risks that should be monitored. However, this does not change the long-term strong prospects for ORBK. Therefore, I reiterate my long thesis on ORBK and I raise my target price to $18 per share. The stock now offers a very nice 17% upside within a year, with additional ~10-15% annually afterwards.

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