TPS Trade Alert – April 11, 2013
April 11, 2013
Recommendation:
Buy Axcelis Technologies (NASDAQ: ACLS) up to $1.35 per share.
Trade Rationale:
The semiconductor industry is amazingly complex. There’s a whole lot more that goes into creating semiconductors than meets the eye.
In particularly, there’s an entire industry based around semiconductor equipment. Wafers can be a heck of a lot more complicated to produce than what many people realize.
For instance, there are machines that are just responsible for the welding on chips and machines used just for cutting silicon into wafers. And, there are machines needed to construct the integrated circuits themselves.
Integrated circuits are the most vital part of the semiconductor – so the machines that create them on the chips are clearly important. It’s the sort of product that only the most specialized and innovative companies can manufacture.
Of course, companies who have the technology and expertise to build this sort of equipment have a major competitive advantage. And that’s just one reason why we’re recommending Axcelis Technologies (NASDAQ: ACLS) for your portfolio.
ACLS develops ion implantation, dry strip, and other processing equipment used in the fabrication of semiconductor chips. The company’s key products are single wafer ion implantation systems used by DRAM, Flash, and Foundry and Logic chipmakers.
Without getting into too much technical detail, the company’s primary market has been in high current ion implanters. Basically, high current implanters are used to maximize output of wafers.
Axcelis has a solid 5%-10% of the total market share in this segment. That’s not bad for a small company. And, it equates to as much as $30 million in revenue per quarter.
What’s more, ACLS has recently entered the medium current implanter market with its Purion product line. Medium current implanters are used in more specialized applications. The company believes as much as 35% of future revenues could come from this segment.
Finally, the company has a profitable aftermarket business to help round out and differentiate sources of revenue.
And that’s not all…
Besides market growth potential, ACLS is in a business with strong barriers to entry. In fact, the company has over 800 patents in its portfolio.
Innovative technology and competitive advantages have allowed Axcelis to pull in $44.6 million in the most recent quarter. While that’s down from the prior year, it’s consistent with the previous sequential quarter’s revenues. More importantly, it’s a reasonable figure for a down market for semiconductors.
Also, the company has mostly been able to maintain their strong operating margins despite the challenging environment for semi equipment companies.
Ignoring restructuring costs, inventory adjustments, and other non-recurring transactional charges, ACLS earned a 35% operating margin for fiscal 2012. That’s in line with where margins should be during a down cycle.
Even better, the company expects a 3%-5% improvement in margins in fiscal 2013.
Best of all, the company is sitting on $45 million in cash and no debt whatsoever. Plus, current assets are an impressive 5.9x current liabilities.
In other words, ACLS is a healthy company and has enough cash to expand into new products and markets or survive a down market.
Yet, despite the market growth potential, competitive advantage, and strong cash position, ACLS shares are trading at just 0.66x book value.
That means if the company was broken up into pieces and sold off, it would be worth significantly more than what the shares are trading for now. Not to mention, the company’s cash position is worth $0.42 per share on its own and inventory is worth $100 million.
Clearly, ACLS shares are vastly undervalued by the market. As such, now’s the time to add this underappreciated semiconductor equipment company to your portfolio.
Remember to use limit orders when placing your trades. And stick to your position sizing rules.
Key Facts:
| Company: | Axcelis Technologies |
| Ticker: | ACLS |
| Recent Price: | $1.17 |
| Market Cap: | $126.6 million |
| Avg. Daily Volume: | 410,884 shares |
Chart:
Category: TPS Trade Alert
