Eagle Test Systems: Peaceful easy feeling
Think back to technology in 1976. Steves Jobs and Wozniak were ready to show off the Apple I to their computer club. Bill Gates and Paul Allen were running “Micro-soft” in Albuquerque. Mobile telephones were only for the wealthy … think CB radio, good buddy.
But Eagle Test Systems Inc. (Nasdaq:EGLT) was already laying the groundwork for its business of making the equipment needed by semiconductor makers to guarantee their chips work.
For investors, Eagle has been a public company since March 2006, through a stock offering priced at $15.50. The question is, since Eagle has landed below its IPO price with the withering economy, can it fly high again?
Analysts who follow Eagle Test Systems think so: of the five polled by Thomson Reuters, three have the stock as a “buy,” with the other two at “strong buy,” with a median price target of $14.50.
Compared with the semiconductor industry since 2008 began, Eagle Test’s shares have risen 8%, while the Dow Jones Semiconductor Index fell 11%. In the past three months, Eagle has gained 15%.
Shares of Eagle Test pulled back after hitting a 52-week high of $14.90 on Aug. 11. The 52-week low of $9.31 was seen on Jan. 22. The stock ended trading on Wednesday at $14.63.
Based outside Chicago in Buffalo Grove, Ill., Eagle Test was founded in 1976 by Leonard Foxman — who is still CEO and president — before the semiconductor business exploded with the popularization of the personal computer. His son, Theodore Foxman, is chief operating officer and executive vice president.
Unlike 1976, today semiconductors are found everywhere. Eagle Test’s automated devices have evolved to handle an array of analog and digital semiconductors. Eagle has a presence around the world and markets several key patented technologies.
In the three months ended June 30, its fiscal third quarter, Eagle reported net income of $6.8 million, or $0.30 a share, compared with $2 million, or $0.09 a share, in the fiscal 2007 quarter. Revenue increased 78.6% to $35.5 million year over year, with a sequential growth of 7%.
Gross margin increased to 65.6%, compared with 62.3% the year before, and rising from the 62.0% of the March quarter. The company has reported gross margins considerably higher than some of its competition, such as Credence Systems (Nasdaq:CMOS), with a healthy six-year average of 63.6%.
Looking ahead, Eagle Test predicted on July 29 that for the current quarter ending Sept. 30, it’s expecting revenue of between $31 million and $35 million (compared with $20.8 million the prior year), and earnings per share of $0.19 to $0.26 (versus $0.13 a year ago) — guidance numbers similar to what it had expected for the just-completed quarter. Consensus estimates at Thomson Reuters call for earnings of $0.25 a share, on $34 million in revenue — toward the high end of the company’s range.
For fiscal 2008, Thomson Reuters analysts’ consensus estimates expect earnings of $1.03 a share, more than doubling the $0.46 EPS posted for 2007. Revenue is expected to climb 56% to $134 million. While revenue is likely to rise substantially from last year’s $86 million, Eagle Test demonstrates the fickleness of the cyclical semiconductor industry: fiscal 2007 revenue dipped 31% from $124.7 million in 2006.
One goal at Eagle Test is to spread out its customer base. The company reported that for fiscal 2007, its top five customers accounted for 58% of revenue, compared with 77% the year before.
Texas Instruments (NYSE:TI) is Eagle’s largest customer, providing 28% of revenue in the most-recent quarter, a drop from 60% in the first three months of 2008. Eagle’s sales to struggling TI fell in half to around $10 million. However, TI might bring its shopping list to Eagle Test as it ramps up a new Philippines factory by year’s end.
Piper Jaffray analyst Auguste Richard maintained a “buy” rating and $16 price target after Eagle Test issued its fiscal third-quarter results, noting “company guidance was a bit conservative … . ” In his July 30 note to clients outlining the “very strong” quarter, Richard wrote, “While we expect revenue to flatten out over the next couple of quarters, valuation remains compelling.”
Canaccord Adams Bobby Burleson reiterated a “buy” rating and $14 price target, saying: “Eagle Test Systems continues to execute well in a tough environment, delivering upside to revenues and EPS in the face of a significant decline for their largest customer, Texas Instruments. We believe product mix and utilization are likely to remain healthy in coming quarters, while revenues are bolstered via Eagle Test’s broadening customer base.”
Deutsche Bank’s Peter Kim headlined his July 29 research note, “Still waiting,” but the wait is “for TI to resume a strong buy cycle,” not for Eagle Test. Sticking with a “buy” rating and a $16 price target, Kim wrote, “we believe EGLT remains a solid company underscored by consistent execution and valuation fundamentals.”
Eagle Test Systems could soar once the semiconductor industry begins to pick up steam, but its stock is managing to glide peacefully through the turbulence triggered by soft global chip demand.
