Brooks Automation (BRKS) is trading near a 22-month low, closing Tuesday down 5 percent at $7.41. Tuesday's decline was led by a downgrade to "Underweight" by Barclays (BCS), which followed a similar ratings change by Credit Suisse (CS) on Monday.
Brooks's stock has been struggling for some time; BRKS now sits some 40% off its 52-week high set in early April. The stock fell sharply during the May broad market sell-off, then stabilized, before disappointing third quarter earnings knocked the stock down another 14 percent.
To be sure, there are reasons for the decline. Though I felt fiscal second quarter earnings in May were reason enough to buy the stock, clearly the market felt otherwise. Granted, the results have been not great so far this year: revenue for the first nine months of fiscal 2012 is down 28% and earnings are off by two-thirds, even on an adjusted basis. And the semiconductor business -- still Brooks's primary revenue source -- is facing weakened demand and inventory issues.
That said, Brooks has fallen too far. The company has $2.78 per share in net cash, and fiscal 2012 earnings will be 42 cents per share. That puts its P/E at 17.6, and right at 11 when backing out the company's net cash. Free cash flow is at a $35 million run rate for the year, an impressive figure considering the company's $300 million enterprise value.
Those numbers are not particularly impressive; but bear in mind that Brooks is toward the down end of the semiconductor equipment cycle. As CFO Martin Headley told the UBS Global Life Sciences conference last month, "There's a pullback in the semiconductor sector, and it's very difficult for us to call a bottom on that."
In an effort to insulate the company from the cyclical semiconductor business, Brooks entered the life sciences segment through its purchases of Nexus Biosystems and RTS Life Sciences. While those businesses stumbled a bit in Q3, after posting their first operating profit in the March quarter, their future looks bright. Brooks already has a 40% market share in automated sample management, according to its presentation to the UBS conference, and it expects that market to grow by more than 20% annually going forward. Brooks's management expects Life Sciences revenue to provide 20% of company-wide sales within two years, up from 8% currently, and has targeted 40% company-wide gross margin (up from 33%), aided by the higher-margin Life Sciences segment.
If Brooks can hit those targets, earnings and revenue growth should boost the stock price from current levels. And if demand returns for Brooks's robotics and vacuum instruments from semiconductor makers, the stock will absolutely take off. Bear in mind that in fiscal 2011, Brooks generated $81 million in free cash and $1.35 per share in earnings -- with no contribution from Life Sciences. It's not hard to envision a future share price near $20 with similar earnings from the semiconductor business, a modest contribution from Life Sciences, and the company's existing cash balance.
But what cements the bull case for Brooks is the fact that it doesn't need to hit those targets AND see a strong rebound in the semiconductor business for the stock to be a solid long-term investment. It really only needs one or the other; or modest success in both realms. Patient long-term investors have a good chance to be rewarded; while they wait, the stock's 4.3% dividend yield seems safely covered by the company's cash flow and substantial cash hoard.
The analyst moves this week seem, to me, short-sighted, another example of Wall Street's too-common habit of raising ratings at the top and slashing them at the bottom. Brooks's management has put together a sensible restructuring of the business; they have been honest about its benefits and challenges; and they have instituted a solid dividend and managed costs while navigating a difficult economic environment. Investors who give the company more time to reach its targets seem to have a good chance of being rewarded.