Cascade Microtech: A Long-Term Buying Opportunity

| About: Cascade Microtech, (CSCD)
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I find Cascade Microtech Inc. (NASDAQ:CSCD) stock to be a good combination of value and growth tech stock. Although the stock price has risen 71.6% since the beginning of 2013, it is still an excellent buy right now. This is compared to the 26.0% rise of the S&P 500 index and the 36.6% rise of the Nasdaq Composite Index during the same period. In this article, I will explain why, in my opinion, Cascade Microtech stock is a remarkably promising long term investment.

The Company

Cascade Microtech is a worldwide leader in the design, development and manufacture of advanced wafer probing solutions for the electrical measurement and test of semiconductor integrated circuits and chips. Each of the 20 largest semiconductor manufacturers in the world, in terms of revenue, is one of Cascade Microtech's more than 800 customers.

Source: Needham Growth Conference 2014

The company was founded in 1983 and is headquartered in Beaverton, Oregon.


Cascade Microtech's products enable precision on-wafer measurement of integrated circuits. The company's products are typically used in the early phases of the development of semiconductor processes where the accuracy and repeatability of measurements is critical to achieving yield from advanced process nodes.

Source: Needham Growth Conference 2014

The Industry

Semiconductor and semiconductor equipment manufacturers have historically been highly cyclical, with periods of strong growth and high margins, which has caused companies to raise capital investment and has, in effect, caused excess supply followed by periods of weakness. The economic data and companies' comments are all saying essentially the same thing, which is that the semiconductor equipment industry has already passed through the bottom of the current cycle. New internet applications will extend the compute environment to every day devices like smart television, wearable, cars, light bulbs and more. This development will increase the demand for semiconductor test equipment.

Book-to-Bill Ratio

One very important parameter when analyzing a semiconductor company is the book-to-bill ratio, which is the ratio between new orders to actual sells. A ratio of above one implies that more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand. On January 23, 2014, SEMI.ORG announced that the North American semiconductor equipment industry posted December 2013 book-to-bill ratio of 1.02. The three-month average of worldwide bookings in December 2013 was $1.38 billion. The bookings figure is 11.1 percent higher than the final November 2013 level of $1.24 billion, and is 48.3 percent higher than the December 2012 order level of $927.4 million. The three-month average of worldwide billings in December 2013 was $1.35 billion. The billings figure is 20.8 percent higher than the final November 2013 level of $1.11 billion, and is 33.8 percent higher than the December 2012 billings level of $1.0 billion.

On that occasion, Denny McGuirk, president and CEO of SEMI said:

Through the final quarter of 2013, both bookings and billings continually improved. The December three-month average bookings were at the highest level since June 2012 - a positive sign for the 2014 spending outlook.

The table below presents the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since the beginning of 2012.

Source: SEMI.ORG

The charts below present the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since 1991.

Source: SEMI.ORG

Valuation Metrics

The table below presents the valuation metrics of Cascade Microtech. All data were taken from Yahoo Finance.

Cascade Microtech's valuation metrics are very good; the company has no debt at all, the forward P/E is very low at 10.68, and the average annual earnings growth estimates for the next five years is quite high at 15%. The PEG ratio, using next financial year forward P/E of 10.68 and the annual earnings growth estimates of 15%, is extremely low at 0.71 (forward P/E divided by growth).

Latest Quarter Results

On February 05, 2014, Cascade Microtech reported its fourth-quarter year 2013 financial results, which beat EPS expectations by $0.36.

Fourth-Quarter Results

  • Total revenue of $34.0 million, compared to $28.2 million for Q3 2013 and $30.4 million for Q4 2012.
  • Gross margin of 45.5%, down from 47.6% in Q3 2013, and up from 43.0% in Q4 2012.
  • Income from operations of $2.2 million, an increase of $0.6 million, or 40.3%, from Q3 2013, and a decrease of $0.1 million, or 3.5%, from Q4 2012.
  • Net income of $8.8 million, or $0.53 per diluted share, compared to $1.7 million, or $0.11 per diluted share, for Q3 2013, and $1.7 million, or $0.12 per diluted share, for Q4 2012.
  • Adjusted EBITDAS of $5.2 million, compared to $3.7 million for Q3 2013, and $3.8 million for Q4 2012.
  • Quarterly book-to-bill ratio of 1.14 to 1.

Full Year 2013 Results

  • Total revenue of $120.0 million, compared to $113.0 million for 2012.
  • Gross margin of 45.6%, up from 44.2% in 2012.
  • Income from operations of $7.3 million, a decrease of $0.2 million, or 3.0%, from 2012.
  • Net income of $13.4 million, or $0.89 per diluted share, compared to $6.1 million, or $0.42 per diluted share, for 2012.
  • Adjusted EBITDAS of $15.8 million compared to $13.6 million for 2012.
  • Annual book-to-bill ratio of 1.02 to 1.

In the report, Michael Burger, President and CEO, said:

We are very excited about 2014 based upon the results for the fourth quarter and the full year of 2013. Our historical products prior to recent acquisitions outperformed the semi-conductor capital equipment market this year, and we've accelerated our growth with the acquisitions closed in the second half of 2013. We set annual and quarterly records for revenue and bookings, while improving our profitability. The markets we serve have been expanded with the addition of Reliability Test Products and ATT Systems, together with our new product introductions that continue to gain traction. Finally, in the fourth quarter, our adjusted EBITDAS increased to 15.2% of revenue and reflects progress towards our success model of 20%. Cascade Microtech is well positioned as we enter 2014.

The company offered guidance for the first quarter of 2014; CSCD is projecting revenue to be in the range of $31.0 million to $34.0 million, with an adjusted EBITDAs in the range of $3.0 million to $5.0 million.

Competitors and Group Comparison

According to Cascade Microtech, the markets for engineering probe stations, analytical probes and production probe cards are highly competitive. The company anticipates that the markets for its products will continually evolve and be subject to rapid technological change.

A comparison of key fundamental data between Cascade Microtech and some of its competitors is shown in the table below. All data were taken from Yahoo Finance.

Cascade Microtech's valuation metrics look better than those of its competitors, if we consider the PEG ratio as the most influencing criteria.

The tables below compare various Cascade Microtech's parameters to its industry median, its sector median and the S&P 500 median. CSCD's growth rates and stock valuation parameters have been much better than its industry median, sector median and the S&P 500 median

Source: Portfolio123

Technical Analysis

Personally I use only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.


The CSCD stock price is 7.56% below its 20-day simple moving average, 3.47% below its 50-day simple moving average and 12.98% above its 200-day simple moving average. That indicates a short-term and mid-term downtrend and a long-term uptrend.

Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -0.1242, and descending, which is bearish (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 51.30 which do not indicate oversold or overbought conditions.

Analyst Opinion

CSCD stock is almost neglected by analysts. Only two analysts are covering the stock and both of them rate it as a strong buy. Personally, I think that it is more an advantage than disadvantage, as in general a stock covered by few analysts has a better chance of increasing its price by a significant rate.

Major Development

On October 02, 2013, Cascade Microtech announced that it has acquired ATT Advanced Temperature Test Systems GmbH, which is headquartered in Munich Germany. ATT Systems is a leader in the manufacturing of advanced thermal systems used in the testing of semiconductor wafers. ATT Systems provides enhanced thermal solutions for wafer testing over expanded temperatures that typically range from -60 to 300 degrees centigrade. Cascade Microtech believes the acquisition strategically positions the combined companies for future system development and access to larger markets. ATT Systems' management team will remain with the company in Munich.

The purchase price for the acquisition includes approximately 8.4 million Euros in cash, approximately 1.6 million shares of Cascade Microtech common stock, and deferred payments of approximately 0.8 million eEuros.


In my opinion, Cascade Microtech will outperform the worldwide wafer fab equipment in 2014. According to SEMI.ORG, in its publication of December 03, 2013, worldwide sales of new semiconductor manufacturing equipment will increase in 2014 by 23.2% to $39.46 billion. System-on-chip (SOC) orders should trend up in 2014 as semiconductor manufacturers and test providers resume equipment purchases following a period of digestion last year.

In think that Cascade Microtech's decision to acquire the German company ATT Systems, which provides enhanced thermal solutions for wafer testing, was a smart move. The acquisition brings thermal expertise and innovative products to support expansion into new markets. According to CSCD, the acquisition provides a basis for revenue growth, market expansion and vertical integration and the company expects that it will have an immediate and positive contribution toward its success model.


According to Cascade Microtech, its operating results have fluctuated in the past and are likely to continue to fluctuate. Factors that are likely to cause its revenue and operating results to fluctuate include:

  • Operating results and financial condition may be adversely affected by volatile economic conditions.
  • The cyclicality of the semiconductor industry affects its operating results, and, as a result, it may experience reduced sales or operating losses in a semiconductor industry downturn.
  • Because CSCD generally do not have a sufficient backlog of unfilled orders to meet its quarterly revenue targets, revenue in any quarter is substantially dependent upon customer orders received and fulfilled in that quarter.


As a leading global supplier of advanced wafer probing solutions, Cascade Microtech will benefit from the rebound in semiconductor manufacturing equipment spending in 2014. The company has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is extremely low at 0.71. Furthermore, Cascade Microtech has an unusually strong balance sheet, cash and marketable securities are at $21.5 million, and the company has not debt at all. The current ratio is very high at 5.60, and the quick ratio is also very high at 3.90. The company is generating a lot of cash; its ttm price to free cash flow is very low at 14.78, and its enterprise value/EBITDA ratio is also very low at 10.94. Cascade Microtech's latest quarter financial results were much better than analyst expectations, the quarterly book-to-bill ratio was at 1.14, and the company set annual and quarterly records for revenue and bookings while improving its profitability.

All these factors bring me to the conclusion that CSCD stock is a smart long-term investment.

Disclosure: I am long CSCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.