The secret to outsized gains in the stock market is to pick a solid company in an out of flavor industry. It could also be a better buy if the stock has temporary issues causing the lower valuations and this situation is about to end. For instance, the near term outlook of the semiconductor industry seems bleak as industry experts expect a slight decline for this year. This is attributed to the generally weaker global economy in Europe and slower than expected consumer confidence. Despite these headwinds, there are solid companies in this industry that the market has overlooked.
A solid play in this space is Brooks Automation (NASDAQ: BRKS). This Massachusetts-based is a supplier of automation, vacuum and instrumentation solutions to semiconductor players such as Samsung Electronics and Taiwan Semiconductor Manufacturing (NYSE: TSM), as well as a provider of solutions to its clients in various markets. These markets include data storage, advanced display, analytical instruments, solar and light emitting diode. Within the semiconductor industry, it sells products and services to semiconductor chip manufacturers and original equipment manufacturers.
It recently reported its full year 2012 results. Its revenues amounted to $519.5 million, a decline from the prior year’s revenues $688.1 million. These figures included $137.3 million revenues from the contract manufacturing divested during the year. This translates to a net income of $136.8 million, or $2.08 diluted per share. This is higher than last year’s $130.4 million, or diluted per share valuation of $2.01. Excluding the one-off gains, adjusted net income would have declined from $88 million or $1.35 diluted per share valuation. However, this is still higher than the previous year’s adjusted net income of $31.3 million, or $0.48.
Management said that the strength in its Brook Life Science Systems have slightly offset the increasing market weakness for the semiconductor equipment products. Thus, it was able to achieve better than expected profitability for the year. It seems that analysts are still bearish over the company’s prospects for next year. They expect earnings per share of $0.07 for the next fiscal year, a significant decline of around 80% from the previous year. For the next 5 years, analysts paint a better picture growth with an estimated average growth rate of 18% a year.
In terms of valuations, the stock trades at extremely cheap levels. It is valued at 3.48 times earnings and has a dividend yield of 4.41%. Other firms such as ASM International (NASDAQ: ASMI) and MKS Instruments (NASDAQ: MKSI) trade at 34 and 19 times earnings respectively.
The reason for the extreme bearishness is the speculation that there will be sharp cuts to Samsung’s capital expenditures for next year. This is also the reason why analysts forecasted lower earnings for the said period.
Despite the concerns, the company has opposing views from the consensus. It mentioned that the seasonality and ongoing contract negotiations with Apple (NASDAQ: AAPL) would improve revenue visibility. Also reported delays from Samsung of its new Line 17 fab in Korea is due to slower conversion rates from memory to logic. Thus, this seems like a temporary situation rather than a fundamental problem. In fact, Brooks Automation’s management believes that the combined capital expenditure from both Taiwan Semiconductor and Samsung will be higher over the next few years.
As an investor, the yield of more than 4% compensates the risks of investing on the stock. However, it would be a matter of time before buyers of the stock will appear. The overhang on the stock price does not have any rational basis. Sometimes, it pays to be a contrarian.