Credence Systems: Simply Undervalued

With the acquisition of NPTest in 2004, Credence Systems (CMOS) extended into the higher end of the ATE market and repositioned itself as a top-tier player there. The purchase also allowed Credence to add a number of major chipmakers to its customer base and gave it a complete product portfolio. However, Credence has been slow to lower its cost structure and has been transitioning a large portion of its manufacturing to an outsourced model. The major transition hurdles have been overcome and the stock has irrationally oversold due to the delay.

The market fails to recognize Credence's product superiority and its product sales. As an example, Sapphire D-6432DFT test solution released in 2007 cut the cost of tests up to 82% for AMD. Credence still benefits from both semiconductor capacity and technology growth, as next-generation chip architectures require more advanced automated testing equipment.

Credence has not lost its edge in this market and the outlook beyond 2008 is bright. Expect management to provide more details on this outlook in the upcoming June 2nd earnings call. The commentary will likely provide a near-term stock price increase above the $1.50 level. Credence maintains more cash per share than the current share price and is trading at a minute fraction of its annual sales, which are still increasing year over year. Additionally, recent delays in shipments should be seen in upcoming quarters as those orders are fulfilled.

Credence is extremely oversold and current price levels are extremely attractive.

Current share price under $1.10 has $2.35 cash per share and trading at a forward P/E (for year end 03-Nov-09) 6.24.

Disclosure: Author holds a long position in CMOS

Comments

[Valuestocks:]

While CMOS might indeed be undervalued, the cash position is down to 1,7 $/share thanks to the repayment of ST convertibles as of May, 13th. They still have around 120 Mio $ LT convertibles which leaves them with 0,5$/share net cash if these convertibles are repaid too.

Given the recent preannouncement I would take the estimates for FY 09 with more than a grain of alt.

2008 May 26 05:15 AM

[Valuestocks:]

While CMOS might indeed be undervalued, the cash position is down to 1,7 $/share thanks to the repayment of ST convertibles as of May, 13th. They still have around 120 Mio $ LT convertibles which leaves them with 0,5$/share net cash if these convertibles are repaid too.

Given the recent preannouncement I would take the estimates for FY 09 with more than a grain of alt.

2008 May 26 05:15 AM

[User 177408:]

CMOS is likely a takeover target. VRGY and ATE may be shopping and CMOS would be a great addition.
Also, if the convertibles are paid as per Valuestocks, that would give a boost to the stock price as those holding the convertibles would likely cover their shorts which they used to hedge the convertibles.

2008 May 26 06:52 PM