Brooks Automation (NASDAQ:BRKS) is a maker of automation and vacuum systems for manufacturers across industries, including semiconductors, clean energy technology, and life sciences. The company is in the midst of a restructuring, brought about primarily by its 2011 divestiture of its contract manufacturing business and the subsequent purchase of life sciences supplier Nexus Biosystems. Those transactions lessened the company's reliance on the cyclical semiconductor industry and improved its position in the higher-margin Life Sciences segment.
Brooks has made some progress in its restructuring, but still faces short-term challenges. Revenues excluding the legacy contract manufacturing business fell year-over-year in both the first (ending December 31st) and second quarter (ending March 31st). Earnings and free cash flow fell sharply as well, perhaps explaining why the stock fell on Friday despite beating estimates in Thursday's Q2 release. The company has blamed weakness in the semiconductor industry and lower-than-expected service revenues for the short-term weakness.
But over the long term, Brooks' plan to diversify its operations and improve its margins appears to be taking hold. Excluding the contract manufacturing business, revenue trends at the company are improving, as Brooks noted in its Q2 earnings presentation:
The Life Sciences segment (represented in orange in the graph above) is executing well and showing the growth the company expected when it entered the market in 2011. While Life Sciences accounted for just 11% of company-wide net revenues in the second quarter, it achieved 15% sequential growth and an operating margin of 40.9%, above the company-wide level of 35%. The segment also achieved operating profit for the first time in the quarter.
The move into Life Sciences was part of the company's plan to improve margins across the board (as was the sale of the traditionally lower-margin contract manufacturing business). That effort appears to be gaining traction as well. As noted in the company's conference call, gross margin improved to 35%, up 110 basis points from Q1 and well past the 32% level in the second quarter of 2011. These improvements put the company on the path toward its stated goal of a 40% gross margin company-wide.
With revenues and margins improving, Brooks looks set to grow earnings and cash flow from the lower floor provided by the first half of fiscal 2012. And yet, after a 14% drop over the past two weeks, the stock offers a very reasonable valuation. Trailing twelve-month earnings are 79 cents per share, excluding gains from asset sales and charges due to the company's restructuring, putting the company's trailing P/E around 13. Based on Q3 guidance, fiscal 2012 earnings look to come in a bit lower; but the continued emphasis on revenue and margin improvement should lead to strong earnings growth for 2013. Indeed, based on analyst estimates, fiscal 2013 earnings of $1 per share are a reasonable expectation. With stock trading as of this writing Friday at $10.43, long-term investors would appear to have an excellent opportunity for capital appreciation in the stock.
In the meantime, Brooks offers $2.78 per share in cash net of long-term liabilities and an 8 cent per share quarterly dividend. With a payout ratio right at 40%, and net cash covering some 9 years' worth of dividend payments, BRKS' 3% yield looks safely covered.
In short, Brooks Automation simply looks like a well-run company with a thoughtful plan toward earnings growth. That restructuring plan, despite headwinds in the semiconductor and clean tech markets it serves, has been executed well, and offers real potential for growth on the top on bottom lines. In the meantime, its low current valuation, above-average yield, and solid balance sheet offer downside protection. BRKS doesn't appear to be an overwhelmingly compelling buy, nor will it ever be a front-page stock. But the stock offers a lot of value, and the drop in the company's share price this month appears to offer new investors a discount that make BRKS a buying opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.