Undervalued CVD Equipment: Facilitating A Change In Semiconductors

Oct.31.11 | About: CVD Equipment (CVV)

Picture an iPad as thin as a sheet of paper, envision a completely transparent smartphone, and now imagine an electric car that doesn’t ever have to be plugged in. These are just a few examples of tomorrow’s nanotechnologies that CVD Equipment Corporation (NASDAQ:CVV) facilitates. What was once limited to futuristic movies, these nanotechnologies have come to life and are transforming semi-conductors and electronic components at a ballistic speed.

CVV develops customized equipment and process solutions aiding in the research and development of solar, nano and advanced electronic components, as well as materials and coatings. The company has seen tremendous demand for its technologies. The company took in $7.5 million in revenue in Q2. That is up 122% from just a year ago. The explosive growth has led to a product backlog of $22.2 mil up 376% from the same time last year. Operating cash flows have also grown considerably with $6 of operating cash generated from every $1 of net income. In an arena where cash is king, a ratio of 6:1 is impressive to say the least.

Growth Potentials

Silicon was the single most important material introduced to the technology industry. Since its discovery it has been the driving force behind all semiconductors, in nearly every electronic device. That is, until now. In 2010 Andre Geim and Konstantin Novoselov won the Nobel Prize for showing the exceptional properties of a material named Graphene.

Graphene is a form of carbon. This 2D material is the thinnest, strongest material ever discovered and is referred to as the “miracle material.” Its conductive qualities are as good as copper and it is almost completely transparent. So what does this mean for the tech industry? The foundation of all electronic devices begins with semiconductors. In 2010 the semiconductor market soared 140% to $41 billion and there are no signs of it slowing down.

This kind of industry change doesn’t happen overnight. Consumers will not have their hands on the new technology for 3-5 years. Therefore the play on this discovery would be on the research and development phase.

Although graphite suppliers are in abundance, there are still significant technological barriers to enter into the Graphene market. Creating Graphene films requires advanced technologies such as Chemical Vapor Deposition and the tools needed to handle the atom-sized film.

CVV is already well positioned in this market, has patents pending, and holds at least one patent relating to chemical vapor deposition and high surface quantity substrate coating systems. The company can mass-produce large quality Graphene film. And with the manufacturing capabilities of its Application Laboratory it can also provide the tools necessary to work with the film.

CVD Equipment Corporation stands to benefit from the numerous researchers developing the new technologies.

Investor Highlights

CVD Equipment Corporation has a market cap of $83 million at its current price of $15.99. GAAP EPS anticipated for Q3 and Q4 are $.19 and $.23 respectively (versus $.14 and $.15 in Q1 and Q2). Revenue for 2011 is slated to come in just over $33 mil compared with $16 million in 2010. Current net tangible assets are $25 million.

Looking ahead 12 months, mounting backlogs conservatively suggest $48 mil in revenue. Using a 2x revenue multiple would peg CVV’s enterprise value at $97 million, giving it a market cap of $121 million or $24 per share (an increase of 50% from its current price).

Products and Competition

CVD Equipment Corporation operates under three divisions. Each division operates with its own operating manager on a day-to-day basis. The product development, sales, and general administration are managed at the corporate level.

CVD/First Nano Division: Supplies Chemical Vapor Deposition Solutions for use in the research and development of solar cells, semiconductors, LEDs, carbon nanotubes, nanowires and various other applications. The CVD/First Nano division also operates an Application Laboratory.

Stainless Design Concept (SDC) Division: Designs and manufactures ultra-high purity gas and chemical delivery control systems for solar cells, semiconductor fabrication, LEDs, carbon nanotubes, nanowires, and various other applications. SDC products are sold alone or packaged with CVD/First Nano products.

Conceptronic Division: Provides electronic assembly solutions, which include the design and manufacturing of reflow ovens, rework stations and nozzles. These solutions are used for semi-conductor packaging and printed circuit board assembly.

CVD Equipment has more than 200 customers worldwide. Customers include industry giants such as Acer, BP Solar, Hewlett-Packard (NYSE:HPQ), IBM, Intel (NASDAQ:INTC), Sharp, and Xerox (NYSE:XRX). The customer list also contains universities and research laboratories including NASA, Cornell University, Harvard University, MIT, Penn State and Yale University. If the customer list seems padded with impressive names, it’s because it is. Research and new discoveries of nanotechnologies (Graphene especially) are expanding at a rapid pace. Industry leaders want to make sure they stay ahead of the curve. CVV provides top-notch products and services to top-notch customers.

The electronic components industry is extremely competitive and price sensitive. Each of CVV’s divisions faces unique challenges. CVD/First Nano competes primarily with budget constrained in-house research and university laboratories. The SDC and Conceptronics divisions compete with much larger firms with more financial and marketing resources. For CVV to continually grow in the electronic component arena it depends on its proprietary systems, advanced knowledge and targeted market.

Summary

There are numerous companies and industries researching Graphene and nanotechnologies. At this stage in the game it is too soon to see which will develop the must-have product. Therefore, the best place to start investing is at the source. With publically traded CVV providing the materials and technologies, it is the best play on the “miracle material’s” future.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CVV over the next 72 hours.