PSB Monthly Issue June 2011
June 2011
TO ZOOM HIGHER!
Food, water, and air are important to our daily survival. We can’t live without them. However, you could also make the same case for semiconductors.
You’re not going to include them in your daily diet. But if you stop and think about it, semiconductors are a huge part of our modern lifestyle.
Every time you turn on your computer or use your smartphone, you can thank semiconductors. And, if it wasn’t for semiconductors, your kids wouldn’t be able to play the latest video games.
Clearly, semiconductors are an essential part of our daily lives.
And the numbers prove it…
Last year, worldwide semiconductor sales reached a record $298 billion… a stunning 31% increase over the prior year. And in the first quarter of 2011, chip sales rose almost 9% to nearly $75 billion.
No doubt about it, demand for semiconductors is going through the roof.
That’s great news for semiconductor manufacturers. But it’s also a boon for another industry… chip equipment manufacturers.
According to industry association SEMI, global semiconductor manufacturing equipment sales topped $39 billion in 2010. That’s a dazzling 148% higher than the prior year’s sales.
What’s more, the industry’s off to a great start in 2011…
The book to bill ratio has increased over 15% since the beginning of the year. A rising book to bill ratio means new orders for semiconductor equipment are rolling in faster than new equipment is being shipped out. In other words, demand for chip equipment is strengthening.
This bodes well for one sub-industry in particular… test equipment.
After all, before a chip ends up in your laptop, it needs to be thoroughly inspected first. And with global demand for semiconductors increasing, it’s more important than ever they function properly.
This adds up to a great investment opportunity…
We’ve discovered one small company who’s making sure semiconductors are made of the highest quality. Allow me to introduce LTX–Credence Corporation (NASDAQ: LTXC).
Let’s take a closer look at this fascinating company…
Name: LTX-Credence Corporation Ticker Symbol: LTXC Market Cap: $431 million Recent Price: $8.72 PSB Rating System 4.7 Stars Raging Revenue: (4.7 stars) Revenues are up 28% over the first nine months of the fiscal year. And they’re expected to increase by 15% to $252 million for the full fiscal year. Beautiful Books: (4.8 stars) Earnings are up four-fold over the first nine months of the fiscal year. And we’re expecting a 97% gain for the year to $1.12 per share. In addition, the balance sheet is solid with $148 million in cash and no long-term debt. Stellar Structure: (4.7 stars) Institutional ownership is very heavy at 75% of shares outstanding. The smart money clearly expects big returns from these shares. Valuation Verification: (4.8 stars) Despite a robust growth outlook, the stock is dramatically undervalued. Based on our valuation analysis, we think the stock is worth at least $15.68 a share. That’s upside potential of at least 80%. Meaningful Milestones: (4.7 stars) The company continues to grab market share from competitors. In the most recent quarter, the company won business from several new customers, replacing the incumbent competitors. |
THE SEMICONDUCTOR TEST EQUIPMENT BUSINESS
LTXC is a global provider of automated test equipment for the semiconductor industry. The company’s equipment addresses a broad range of test requirements for the wireless, computing, automotive, and digital consumer market segments.
And, LTXC’s customers include many of the world’s leading semiconductor manufacturers… Companies like Intel (INTC),Texas Instruments (TXN), and Advanced Micro Devices (AMD) just to name a few.
Automated test equipment plays a critical role in the semiconductor manufacturing process.
As you might expect, not every chip makes it through the assembly process in perfect condition. For example, parts can be defective, cracks may appear, or bonding might be poorly connected.
So before being shipped to customers, every chip must be tested…
And LTXC provides the tools for this important job.
The company offers a diversified portfolio of testing machines to get their client’s products off the assembly line. Each of their four product platforms addresses a specific market segment with little overlap in capability and pricing.
But what I really like about LTXC is their business model…
You see, LTXC is focused on developing innovative products that reduce each customer’s cost per test. Makes sense… what company doesn’t want to save money anywhere they can? As a result of this strategy, LTXC is either number one or two in each of their target markets.
In addition, the company keeps costs down by outsourcing equipment manufacturing to contract manufacturers. By not building and operating their own manufacturing facilities, LTXC is able to save huge amounts of money every year.
Clearly, LTXC is a leader in the automated test equipment industry… And their business model is helping them expand market share at a rapid pace.
Now let’s take a look at the company’s financials…
THE NUMBERS
Over the last nine months, LTXC’s numbers have skyrocketed.
Revenues are up 28% to a hefty $187 million. Net income of $42 million is 307% higher than in the prior year period. And best of all, earnings have surged nearly four-fold to $0.85 per share.
No doubt about it, LTXC is growing by leaps and bounds.
And the outlook for fiscal year 2011 is quite bullish as well.
Revenue is expected to hit $252 million for a year over year increase of 15%. And earnings are forecast to soar 97% to $1.12 per share.
In addition to great numbers, LTXC has a strong balance sheet.
The company’s currently sitting on $148 million in cash. Current assets are over 2x current liabilities. And the company has no long term debt. Management clearly knows how to run a healthy operation.
INVESTMENT RISKS
Of course, no investment is without risks, and LTXC is no exception.
The strong demand for chip equipment depends on the global economic recovery continuing. If the recovery falters, LTXC’s growth could slow.
Another risk is the company’s dependence on their top ten customers for over 75% of revenue. If one or two of them were to leave, LTXC would likely suffer.
And last, international customers make up over 64% of LTXC’s sales. Any type of slowdown overseas could put a dent in future growth.
POTENTIAL RETURNS OF AT LEAST 80%
At a recent price of $8.72, LTXC shares are trading at just 7.8x earnings. That’s well below the industry average of 14x earnings. If LTXC simply trades at the industry average P/E, the shares would rocket higher by 80%.
And, trading at the industry average is well within reason for this solid company. With strong earnings projections and solid overall numbers, LTXC is poised to move significantly higher.
Now’s the time to grab our shares in this fast growing, undervalued company.
Based on our analysis we see the stock trading to at least $15.68 a share. Buy LTXC now for potential gains of 80% or more.
ACTION RECOMMENDATION
BUY LTX-Credence Corporation (NASDAQ: LTXC) up to $9.50 per share.
Recent price is $8.72.
Use a stop-loss of $5.67 on this position.
Don’t forget your position sizing and stop-loss rules.
REVOLUTIONIZING THE CAR BUYING EXPERIENCE
The car and truck industry had a memorable year in 2009. Unfortunately, it was for the wrong reasons. Vehicle sales fell off a cliff.
According to Autodata, 2009 was the worst year for auto sales in over two decades. The global financial crisis essentially brought the industry to a standstill.
Rows and rows of inventory were sitting in car lots all over the country. Thousands of people were unloading their cars for pennies on the dollar. And, to add further insult to injury, General Motors and Chrysler were in bankruptcy.
It’s amazing how much has changed in just two years…
Today, cars and trucks are moving off the lot faster than the speed of light. According to the LA Times, sales at Ford have risen by over 19% in the last year. And Chrysler has seen their sales climb 17% during the same time frame.
Even though it costs less to buy a vehicle from a private seller, most people still buy from a dealer.
There’s a big reason why…
It’s called auto financing.
You see, most people go through a bank to buy their car or truck. Few people these days can afford to pay cash for a vehicle. And many dealers even offer financial incentives for their customers.
As a result, auto financing is big business.
According to the Federal Reserve, the average new car loan is over $27,000. With millions of people financing vehicles every year, you can see how auto finance companies can rake in the cash.
It all adds up to a great investment opportunity…
You see, we’ve discovered one small company benefitting from the big pick up in new vehicle sales. This fascinating company provides the tools vehicle financing firms need to market their products.
And they have locations all over the world. So no matter if a car’s bought in Miami or Milan, this company is benefitting.
Introducing NetSol Technologies (Nasdaq: NTWK)…
Name: NetSol Technologies Ticker Symbol: NTWK Market Cap: $80 million Recent Price: $1.45 PSB Rating System 4.7 Stars Raging Revenue: (4.5 stars) Revenue is expected to increase 11% this fiscal year to over $41 million. And with the company adding new customers regularly, we could see this estimate revised higher. Beautiful Books: (4.9 stars) Earnings are expected to grow more than four-fold in fiscal year 2011 to $0.18 per share. And the balance sheet is solid with $3 million in cash and very little long-term debt. Stellar Structure: (4.6 stars) Insiders are clearly confident with ownership just under 12% of shares outstanding. Institutional ownership is small at 16%, but as it increases so will the share price. Valuation Verification: (4.9 stars) Despite a strong earnings outlook, the stock is dramatically under-valued. Based on our valuation analysis, we think the stock is worth at least $3.60 a share. That’s upside potential of 148% or more. Meaningful Milestones: (4.7 stars) The company just inked a deal to implement their entire suite of financial software with a major auto manufacturer’s captive finance arm in India. |
THE AUTO FINANCING BUSINESS
NetSol designs, develops, and markets financial software products for a variety of different industries. They focus primarily on the automobile finance and leasing industry. But they also provide software to the banking, medical, and financial services industries.
This company is clearly no one trick pony.
Since NTWK derives most of their revenue from the auto industry, we’re going to focus on that particular area.
The auto industry’s very competitive. There are over 18,000 new car dealerships and over 45,000 used car dealerships in the US alone. With such fierce competition, auto dealers must be aggressive to close new sales.
And, NTWK has the tools to help them do so.
Here’s a great example of NTWK helping out a car buyer and dealer…
If you’re in the market for a car or truck, you now have the option of going to an auto dealership’s website and filling out a credit application online. By doing so, you arrive at the dealership with one less thing to worry about.
What’s more, the dealer’s happy because they already know what your financial situation is. As a result, they don’t waste time showing you vehicles you can’t afford.
No doubt about it, NTWK’s software is revolutionizing how people buy vehicles.
And the company’s software is a big hit across the auto industry.
Major dealers like Mercedes Benz, Nissan, and DaimlerChrysler all use NTWK’s products. And, many other dealers are coming on board every quarter. But the best part is… once the company acquires a client, they have them for life.
NTWK has never lost a client in its 15 year history!
Now the company is going global…
NTWK just signed a multi-million dollar deal with a major captive financing company in Japan. This deal allows them to expand their share in the huge, fast-growing Asia-Pacific market.
The company is also launching a joint venture in Latin America with one of the biggest development companies in Brazil. With this agreement, NetSol gains access to a $4 billion software market growing 16% annually.
What’s more, the company’s doubling its office size and staff in China. This puts NetSol in better position to profit from the robust long term growth of China’s emerging auto industry. Remember, China surpassed the US last year as the world’s largest auto market.
NTWK’s future looks bright… But the present isn’t too shabby either.
THE NUMBERS
NetSol just reported terrific third quarter earnings…
Revenue jumped 21% year over year to a record $10.8 million. Net income soared to a whopping 463% to $3.3 million. And earnings tripled to $0.06, crushing the analyst’s estimate of $0.02 per share.
NTWK is clearly heading in the right direction… and there’s more upside ahead.
For fiscal year 2011 (ending in June), revenue is expected to increase by 11% to over $41 million. And earnings are projected to more than quadruple to $0.18 per share. That’s a strong growth outlook by any measure.
The company also sports a clean balance sheet.
NTWK has over $3 million cash in the bank. Current assets are 1.9x current liabilities. And with very little long term debt, the company has financial strength moving forward.
INVESTMENT RISKS
No investment is without risks and NetSol is no exception.
The company’s bullish growth outlook depends on the economic recovery continuing. If the economy falters, NTWK could suffer a slowdown as well.
Another risk is a potential drop in demand for cars and trucks. If vehicle sales start declining, the company could be impacted.
And finally, NetSol does business in Pakistan and the Middle East. Ongoing political tensions could impact their business in that region.
POTENTIAL RETURNS OF 148%
At a recent price of $1.45, NTWK shares are trading at just 8.5x earnings. That’s an incredibly low P/E ratio for a company expected to grow earnings 20% annually over the next five years.
To put it another way, the company’s PEG ratio is a low 0.43. This means the stock is trading at a shocking 57% discount to the company’s projected growth rate.
And that’s not all…
The shares are also misvalued on a price to book basis. Right now NetSol has a P/B ratio of 1.52x… well below the industry average of 4.70x.
No matter how you slice it, NTWK’s shares are clearly undervalued.
NTWK deserves a valuation consistent with their stellar earnings growth. If the shares trade up to that level, we’ll be looking at gains of 140%!
With the economy continuing to improve and strong revenue growth moving forward, there’s no reason why the shares shouldn’t move a lot higher.
Based on our analysis, we see the stock trading up to at least $3.60 a share. Buy NTWK now for potential gains of 148%.
ACTION RECOMMENDATION
BUY NetSol Technologies (NASDAQ: NTWK) up to $1.74 per share.
Recent price is $1.45.
Use a stop-loss of $0.73 on this position.
Don’t forget your position sizing and stop-loss rules.
- None at this time.
Category: PSB Monthly Issues
