In the world of technology, most attention usually falls upon those companies with iconic brands or with those that get the most buzz. In the semiconductor sector, the spotlight falls on those companies gaining market share or that are identified as major suppliers to the hottest new products.
Often overlooked are those companies that provide the capital equipment that enable the chip makers to design and manufacture the smallest, the fastest or the chip with the lowest power consumption. Other capital equipment manufacturers provide the tools to manufacture the flat panel display on your tablet, smart phone or television.
Israel has a well-deserved reputation for technology innovation. The country is home to the research and development centers of many of the largest and most important technology companies. Israel is also home to several of the most innovative semiconductor capital equipment manufacturers. We find two companies, Nova Measuring Instruments Ltd (NVMI) and Orbotech Ltd (ORBK), particularly interesting.
Nova Measuring Instruments is located at the Weizmann Science Park in Ness Tziona, close to the campus of the world-famous Weizmann Institute of Science. The company is a designer, developer and manufacturer of integrated process control metrology systems and design. It also offers a full line of stand-alone metrology used in the manufacturing process of semiconductors. Their metrology products are used to measure various thin film properties and circuit dimensions during the semiconductor manufacturing process.
Nova shares certain risk characteristics that are common in this sub-sector. The company is small with a market capitalization of about $222 million. It is dependent on just two product lines for most of its revenues. The semiconductor industry is highly cyclical. The world-wide financial crisis in 2008 and 2009 impacted capital equipment purchasing by semiconductor manufacturers and Nova's product lines are subject to swings in demand. As a result, the company may experience operating losses for any given year. Nova also has very few customers which increase the likelihood that sales and operating profits will fluctuate significantly from quarter to quarter.
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In 4Q11, sales declined 29% to $19.2 million compared to 4Q10 and 26% from 3Q11. For the full fiscal year, sales topped $102.8 million or 19% more than 2010 sales of $86.6 million. For 1Q12, Nova reported $22.6 million in revenues, up 18% from 4Q11. Gross margin expanded to 56% from the company's more normal annualized margin of 40%. GAAP net income is $2.7 million, or $0.10 per diluted share. The company's sales were at the high end of guidance and the operating margin jumped to 14% from 10%. The company announced its expectation that increased demand for tablets, smart phones and the new ultrabooks will drive demand for NAND and DRAM.
For 2Q12, management provides guidance to expect revenue in the $24.5 - $26.5 million range with operating margins of 13% - 17%, and with GAAP diluted EPS of $0.09 - $0.13. Thomson Reuters provides estimates from two analysts. They forecast 2Q12 revenues in the $25.7 million to $29.1 million range and full year sales of $101.4 million to $102.5 million. These analysts also expect 2Q12 EPS of $0.16 and for the full year, estimate EPS in the $0.60 - $0.62 range.
Other positives for Nova include no debt and free cash flow of $22.9 million. At the end of 1Q12, the company held $26.594 million in cash. The company has a clean balance sheet and it is possible it will use some of its excess cash to make an acquisition. We would give Nova Measuring Instruments a target price of $14.
Orbotech focuses on another segment of the semiconductor capital equipment market. The company provides yield-enhancing and production solutions for printed circuit boards (PCBs) and liquid crystal displays (LCDs) and similar solutions to manufacturers of other electronic components such as touch screens. Its products include inspection, test, repair and production systems for PCB and flat panel display (FDP) manufacturers. More specifically, its products are in the categories of automated optical inspection (AOI), automated optical repair (AOR) laser direct imaging, digital legend printing, laser drilling and laser plotters, among others.
The company benefits from the current trend in mobile devices such as smart phones and tablets. The increased consumer demand for smart phones, tablets, e-readers and other mobile connected devices and the demand for high definition, more power efficient, low cost FPDs across a number of sectors, such as consumer electronics, communications, healthcare, government and industrial applications are all positive trends for Orbotech.
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The company reported FY2011 revenues of $565.3 million, a 7% increase over 2010 and GAAP diluted EPS of $1.16 compared to $0.95 in 2010. Revenues in 4Q11 declined to $133.3 million, compared to $144.4 million in the third quarter and $128.4 million in 4Q10. GAAP net income for the fourth quarter of 2011 was $2.5 million, or $0.06 per share diluted, compared to GAAP net income of $14.7 million, or $0.34 per share diluted, for the third quarter of 2011 and GAAP net income of $4.0 million, or $0.11 per share diluted in 4Q10.
Orbotech carries little debt and cash represents about one-third of its market cap. The company throws off substantial free cash. All this leads me to conclude the company has the wherewithal to sustain itself through the tumultuous semiconductor market cycles.
The company provides guidance for FY12. It expects to report revenue of $500 million and GAAP earnings of $1.00 to $1.10 per share diluted. Thomson Reuters indicates that seven analysts forecast FY2012 sales in the $490 million to $502.2 million range and earnings in the range of $0.85 to $1.08. Zacks Investment Research reports target prices in the range of $11.50 to $16.00. The average is about $14.00.
Both companies are small and suffer the vicissitudes of market fluctuations. However, these are financial strong companies with staying power and product offerings that are contenders in a fragmented industry. Over time, these companies will continue to grow or be acquired by larger companies. These companies are worth a look by patient investors.