Why Investors Are Overreacting to Amtech's Shelf Offering

| About: Amtech Systems, (ASYS)

Amtech Systems, Inc., (NASDAQ:ASYS) supplies horizontal diffusion furnace systems used for solar (photovoltaic) cell and semiconductor manufacturing. The Company provides products and services to two industries: the solar industry and the semiconductor industry. The Company's solar and semiconductor equipment is sold under brand names of Tempress Systems and Bruce Technologies, which have customers in both the solar industry and the semiconductor industry. Within the solar industry, it provides diffusion and automation equipment to solar cell manufacturers and it also offers plasma enhanced chemical vapor deposition [PECVD] and phosphocilicate glass [PSG] equipment. Within the semiconductor industry, it provides equipment to manufacturers of analog, power, automotive and microcontroller chips with geometries greater than 0.3 micron.

Amtech Systems announced its Fiscal ’11 First Quarter results after market close on February 8th. After opening the following day at over $30, the stock has since fallen below $25. Longs are puzzled as to why such a drop has occurred considering such a stellar report which crushed analyst estimates, the details of which include:

  • Record net revenue of $53.7 million, up 18% sequentially from $45.4 million in Q4 2010.
  • Record quarterly bookings of $137 million ($127 million solar), up 176% sequentially from $50 million ($41 million solar) in Q4 2010.
  • Record quarter-end backlog of $173 million ($162 million solar), up 83% sequentially from $94 million ($85 million solar) at September 30, 2010. (In Fiscal 2010, Amtech was able to realize 60% of this $94 backlog in revenues. If the company realizes 60% of its $173M in revenues, that event alone would account for $103M without even taking into account revenues from current operations).
  • Net income of $5.0 million, or $0.52 per diluted share, compared to net income of $5.4 million, or $0.58 per diluted share, sequentially.
  • Expected guidance for Fiscal 2011 full year revenues to surpass $230 million, a greater than 92% increase from fiscal 2010, with fiscal 2011 second quarter revenues in the range of $55 to $60 million.

While margins are expected to decrease due to increased R&D and acquisition costs, these factors alone pale in comparison to the extraordinary projections the company has outlined for this fiscal year. Taking the company’s baseline revenue projection of 230M and shrinking the company’s profit margin to just 8% to account for increased costs, we’d arrive at net income for Fiscal 2011 of 18M, for EPS of about $1.87, assuming a fully diluted share count of 9.6M.

EPS of 1.87 equates to a Forward P/E of just over 13 (using the PPS at the time of this writing of $25). Were the company to be awarded its present P/E ratio of 26 by the end of this year, it would be trading at a price of just under $50. Were it to be awarded a P/E equal to that of its industry, sector, or the S&P average as a whole, the stock would be trading between $37 and $44.

This should all be good news to investors. However, the company also announced in an S-3 filing on that same date a shelf offering, in which up to $60,000,000 may be raised, causing many investors to flee the scene due to dilution concerns. It is my belief that the collective misunderstanding of what this offering does and does not mean is what’s caused the stock’s recent price depreciation. It will now be my undertaking to clear up the confusion:

These securities are to be offered on a delayed or continuous basis to raise a maximum of $60,000,000. This is the ceiling price. They will not be raising more than this amount, but they could raise an amount lower.

A shelf offering may include debt, common stock, preferred stock, and warrants, so it should be remembered that some of these security offerings, if offered, would have no dilutive effect whatsoever on common shareholders. Note that, however, for purposes of this article I will assume the company will raise the full 60M from the issuance of common stock alone.

These securities, if issued, will likely not be issued all at once. Under the company’s prospectus, they have up to 3 years to raise these funds. If Amtech’s share price continues to increase during that time, less and less equity securities would have to be issued.

Lastly, the company states that, “each time [they] sell securities under this shelf registration statement, [they] will provide a prospectus supplement that will contain specific information about the terms of that offering.” Considering there’s yet to be any such filing, shareholders should not conclude that any dilution has yet occurred. Thus, at the date of this article (February 10), we’re still looking at 9,408,815 shares outstanding.

Here’s where you have to decide for yourself whether the financing will bring enough additional value to the company to offset the dilutive aspect thereof. Let’s assume under a “worst case scenario” the company issues an additional 3M shares. Now, in order for the company to follow through with this financing without causing economic dilution, they would have to issue these 3M shares according to the following formula (where M2 = the new market cap which would reflect no dilution):

((1 / 9,408,815) x 235,220,375) = ((1 / 12,408,815) * M2)

25 = ((1 / 12,408,815) * M2)

310,220,375 = M2

Thus, the market cap would have to grow by 75M (310,220,375 - 235,220,375) and each of the 3M newly issued shares would have to be given an offering price of $25.

But we know this can't be the case because the company is only raising 60M, not 75M. We know that by issuing 3M shares to raise 60M in funds, the company's offering price would be $20. So by being diluted, we’ll be losing about 15M in shareholder value relative to a non-dilutive scenario.

However, the recent price depreciation reflects a reduction to market cap that far exceeds this 15M net loss to shareholders. Amtech’s market capitalization at the close of trading on February 8 was about 273M. At a price of $25, the market cap is a mere 235M. Thus, investors have allowed what could equate to a net loss to market cap of no more than 15M to over-exaggerate itself to the tune of nearly 20M (and perhaps even more by the time this article is published). Subtracting 15M from 273M would lead to a current PPS just over $27.

Thus, if you thought $29 was a fair price before the announcement of the shelf, you'd agree that $27 is now a fair price and that anything below that point is mistakenly undervalued. And keep in mind that this is based on my conservative assumptions that (a) the company will raise the full 60M by offering 3M shares at a price of $20/share (b) this capital raise will be purely in the form of additional common stock. If my conservative 3M/$20 scenario ends up being too conservative, and the company instead issues these shares at, say, $25, this overreaction would become even more pronounced. Likewise, if the company raises some of the 60M in debt, this would also be indicative of heightened overreaction.

In conclusion, ASYS is a strong buy under $27 based off of misunderstanding alone and I encourage investors to hold for much higher prices hereafter as ASYS continues to fire on all cyclinders throughout the course of 2011.

Disclosure: I am long ASYS.