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Bull of the Day: Ultra Clean Holdings (UCTT)

Ryan McQueeney
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Heading into 2018, investors were nervous about the semiconductor industry’s ability to maintain its hot streak. This hurt suppliers, especially those with soft outlooks of their own. But one of the most interesting stocks in this space—Ultra Clean Holdings (UCTT)—has successfully rebounded and now looks like an interesting pick.

Ultra Clean supplies critical subsystems to the semiconductor capital equipment, flat panel, solar, and medical device industries. The firm offers gas delivery solutions, improved cycle times, component neutral designs, and testing capabilities. Ultra Clean’s customers are primarily OEMs.

Strong full-year analyst estimate revisions have helped the stock earn a Zacks Rank #1 (Strong Buy), and its current valuation looks especially attractive right now. Let’s take a closer look.

Latest Earnings and Outlook

Ultra Clean most recently reported earnings on April 25. The firm posted adjusted profits of $0.69 per share, beating the Zacks Consensus Estimate by nine cents and improving from the $0.47 per share seen in the prior-year period. Meanwhile, revenue came in at $315 million, topping our consensus estimate of $283 million and improving from just $205 million last year.

UCTT’s solid quarter resulted in stronger analyst sentiment for the company’s full-year and next-year outlook. Here’s a look at the estimate revision activity we have seen for Ultra Clean lately:

Estimate revisions tend to reflect the evolving nature of business trends, and positive revisions usually reflect analyst optimism about a company’s outlook and profitability. In other words, one of the simplest ways to determine whether a stock is poised to move higher in the coming weeks is to study its latest earnings estimate revision trends.

As we can see, the Zacks Consensus Estimate for the firm’s 2018 earnings has moved six cents higher in the past two months. Ultra Clean may no longer be a hot earnings growth stock, but improving analyst sentiment is typically a great sign for near-term share price performance. It is also encouraging to see that this trend extends into UCTT’s fiscal 2019.

Valuation

Another reason to like Ultra Clean right now is its valuation—especially when looking at its Forward P/E. Here’s how the stock has traded in that key metric compared to its peers over the last year:

UCTT is currently trading at just 7.1x forward 12-month earnings. That is a significant compared to its industry, and it is also near the lowest valuation the stock has seen in the trailing 52 weeks. This suggests that UCTT is looking pretty cheap right now, giving investors a unique opportunity to buy on the low.

Cash Flow

As mention, UCTT experienced some volatility in late 2017 and early 2018 after the company failed to inspire investors with its outlook. Nevertheless, it is important to note that, even during these rocky stretches, the company was able to improve its financial position and generate strong cash flow.

UCTT’s free cash flow has been steadily rising over the past two years after a short downturn in late 2015. This is a great trend to see, especially in a capital intensive industry such as its own. Building and implementing gas delivery subsystems is no simple task, so a healthy cash flow is something every investor should appreciate.

Bottom Line

The worst appears to be over for UCTT, and now investors have the unique opportunity to buy a discounted stock with a favorable earnings estimate revision outlook. Meanwhile, the company has proven its ability to weather the storm while maintaining solid free cash flow. This Zacks Rank #1 (Strong Buy) is certainly worth a look right now.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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