An old spinout of Eaton Corp (NYSE: ETN), Axcelis Technologies (Nasdaq: ACLS) designs, manufactures and services ion implantation, dry strip and other processing equipment used in the fabrication of semiconductor chips. The semiconductor capital equipment industry is very cyclical, and as a smaller player in the industry, ACLS has not been immune, and gone through protracted periods of losses. In the past few years, the company has taken numerous steps to reposition itself for the next cyclical upswing by listening to its customers and investing heavily in R&D to revamp its product line to expand its addressable market opportunity, right-sizing its cost structure to substantially lower its breakeven level, establishing new collaborative partnerships, and optimizing its balance sheet to unlock value. Now with signs of a cyclical upswing occurring, and being led by memory, ACLS is poised for accelerating earnings potential beginning in Q4’2013 that could drive its stock price substantially higher.
However, with a few nearer term catalysts on the horizon, investors may not want to wait too long before purchasing shares. As an early indicator, investors should consider that insiders recently purchased stock in the open market in August at current levels. These stock purchases coincide with the one year anniversary of ACLS’s new Purion M product line entering an evaluation period with a major customer. Sell-side analysts are starting to take notice and listening in to the company’s recent conference call, which at least opens the door to new broker initiations in the future. The downside risk appears mitigated by ACLS’s strengthened balance sheet, and dramatically improved operating financial model that has stemmed further cash burn. As the company hits an inflection point with new customer contracts, and proof its earnings cycle is under way, we expect ACLS’s valuation discount to peers to narrow, and the stock to appreciate substantially from its current price
- Imminent Customer Contract Announcement Would Open A New $35 – $70m Annual Revenue Opportunity
- Substantial Earnings Leverage with Numerous Costs Taken Out During The Last Cycle
- Numerous Bullish Indicators Include Insider Buying, Large Options Activity for a Small Cap, and Potentially New Sell-Side Analyst Interest
- Strengthened Balance Sheet and an Aftermarket Global Services Business Both Offers Downside Protection
- Current Valuation at a Discount to Peers with Earnings Scenarios Pointing to Considerable Upside Share Price Potential
Share Price Potential:
Because Axcelis is not widely followed by investors and sell-side analysts, the stock is not receiving a valuation commensurate with its above average revenue and earnings growth potential. The shares currently trade at 0.6x and 11.0x 2014E revenues and EPS (all based on one conservative analyst’s estimates). Moreover, the stock trades at a negligible premium to book value, which also doesn’t capture the company’s robust IP patent portfolio or value of its large NOLs amounting to $118m. From a historical valuation perspective, ACLS still trades well below its average valuation throughout each of its previous cycles. We analyzed the share price performance during previous cycles where revenues and EPS exceeded $100m and $0.10c EPS and find that its stock price easily reached price targets of $6.50 per share, representing 225% upside from the current price. Axcelis may also have strategic value as an M&A target and would most certainly fetch a share price in excess of its current $2.00 price. Our analysis of recent M&A deals in semiconductor capital equipment show average revenue, EPS and tangible book value prices at 2.3x, 18.7x, and 3.8x, respectively. Even at a bare minimum of 1.0x sales and 2.0x tangible book value, Axcelis share price target would be $3.00 – $3.50 or 50%-75% higher than today’s stock price.
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