Analyst Gary Hsueh with CIBC World Markets says the company “did very well,” and he’s raised his estimates for the company’s profit this year and next, but he’s also maintaining his “sector perform” rating on the stock, which suggests gains in the shares in the near future might be elusive. The shares were up as much as 19% yesterday following Wednesday’s report.
Nanometrics, which makes equipment that’s built into semiconductor manufacturing machinery, counts semi equipment blue-chip Applied Materials (AMAT) as its biggest customer. The surprise on Wednesday was that many were expecting not much improvement in profit from the first quarter’s 26-cent-a-share loss. The story, says Hsueh, is while the company reported revenue more or less as expected, at $37.3 million, the company revealed a whole bunch of cost-savings that had not been expected. Interim chief executive Bruce Rhine has not been giving formal guidance to the Street of late, and so no-one was quite prepared for the magnitude of cost savings, says Hsueh.
“The flat revenue modeling was right, so we weren’t surprised on the top line, but on the bottom line they improved materially,” Hsueh told me in an interview. “They’ve been actively pruning their fixed asset base,” Hsueh says of Nano, shutting down a facility in Massachusetts, streamlining another facility in York, England. “They’ve knuckled down on SG&A, cutting headcount, and their stock-based compensation dropped in half,” in the quarter, says Hsueh, which is interesting because Hsueh’s partial explanation for all the fancy cost-cutting is that Rhine holds 8% to 9% of Nano’s shares, giving him a very vested interest in improving the company’s fortunes.
So, can it continue? Hsueh has raised his profit estimate for this year from a loss of 75 cents to a loss of 38 cents, but the problem for the stock is that in order for the company to be valued on a P/E basis, the entire chip equipment industry needs to see pickup in order for the company’s revenues to start to grow. And that’s elusive at the moment, with chip companies ramping down orders for manufacturing equipment. “I wouldn’t say capital spending is up next year – I think that is going to be elusive,” says Hsueh. “Until we get more comfortable with that, we can’t value this company on earnings.”
And so for the moment, the most that can be said of the company is that there’s more room to restructure, and enough cash to sustain a burn rate for the near term while it does that. And the most that can be said for the stock is that it has a tangible book value of $5.25, in Hsueh’s estimate. That gives him some confidence there’s support for the stock at $7 to $8 per share. And the Nano story will be interesting to follow, as it’s the only restructuring story left in chip equipment, according to Hsueh.
But to move beyond that, investors will need to see Rhine deliver sales growth at some point.