When chip equipment maker Applied Materials (Nasdaq: AMAT) surpassed $10 billion in annual revenue for the first time in fiscal 2011, its competitors could only sigh. The company's industry leadership was never in doubt, but a series of acquisitions gave it such a broad suite of offerings that rivals wondered if they could ever take market share again.
Applied Materials' massive market presence eventually led its two biggest rivals, Lam Research (Nasdaq: LRCX) and Novellus Systems to join forces in 2011, but even that combined entity has yet to crack the $5 billion annual revenue barrier.
KLA-Tencor (Nasdaq: KLAC) is also in Applied Materials' rearview mirror, with only $3 billion in annual sales. And a handful of smaller companies bring up the rear, none of which have even $1 billion in annual revenue. (Note:Only U.S. companies have been considered here.)
Lost in the crowd is little-known Axcelis Technologies (Nasdaq: ACLS), which had $400 million to $500 million in annual sales a decade ago, but has slumped badly in recent years, with sales falling to just $200 million in 2012.
Rivals such as Applied Materials used their financial firepower to acquire or develop the products that Axcelis had been known for, taking whatever small market share the company had cultivated. Yet, Axcelis may be emerging from the ashes, and the stage is set for a steadily improving outlook in the quarters ahead. Meanwhile, shares remain extremely cheap.
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Moving The Ions
Axcelis makes expensive machines that stimulate ions in an electric field, which is a key process in the manufacture of wafer-based semiconductors. The ion implant equipment market has three areas of focus: high-current machines (50% of industry sales), medium-current (35%) and high-energy implanters (15%).
Axcelis was the second-largest provider of such tools, behind only Varian Semiconductor. Applied Materials wanted a big piece of the ion implant market and bought Varian in 2011 for an eye-popping $4.9 billion. That worked out to five times annual sales. As I'll note later, ACLS trades at a fraction of that multiple.
The R&D Payoff
Over the past three years, Axcelis has spent more than $100 million developing a pair of new product lines that management thinks will put the company back in the leadership position it held in the past decade:
Optima HDx: These machines, which are aimed at the high-current segment of the market, use "cold implant" technology to more precisely deposit ions onto a wafer. The better the ion deposition, the less current that can leak out of a chip. Competitors still use a technology known as "ribbon beam," which is not as accurate, especially among smaller chip designs.
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Purion M and Purion XE: These target the medium-current and high-energy niches of the market, respectively. The Purion XE in particular may be a game-changer for the company. As its first high-energy machine, it will allow ACLS to serve this market niche.
Customers have been visiting the company's Massachusetts headquarters for product demos, and the response to these new products has been quite positive, especially regarding the Purion XE line.
"All have been impressed with the product's outstanding performance and the improvement in their device results," noted CEO Mary Puma in a recent call with analysts. She added that customer interest is also growing in the new Purion M machines, which can "deliver very low-energy implants at high levels of productivity, something previously unavailable to the industry and important as device features continue to shrink."
Of course, the real tangible measure of customer interest is in orders, and by this measure, Axcelis has really turned the corner. Third-quarter system bookings of $26.4 million were up 60% from the previous quarter and more than 200% from the first quarter. That led to a book-to-bill ratio of 1.44, up from 0.97 in the second quarter. And system backlog, including deferred revenue, was $30.5 million for the quarter, an increase of 35% over the second quarter.
Puma said she believes that the early positive indications and growing backlog set the stage for a return to $90 million in quarterly revenues, which the company hasn't seen since 2007.
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Wall Street analysts are looking for a 58% jump in sales next year to more than $312 million and expect that ACLS will earn $0.25 a share. More importantly, the outlook into 2015 and beyond should strengthen as the Optima and Purion machines are expected to be tested by many new customers next year, with orders flowing after a six- to nine-month testing period.
Meanwhile, shares don't yet reflect any sort of revenue surge. Axcelis has an enterprise value of around $226 million, which is well below the 2014 revenue projection of $312 million, equating to an enterprise value-to-sales ratio of just 0.72. Recall that Applied Materials paid nearly five times sales for rival Varian.
As Axcelis continues to build backlog over the next few quarters, investors will start to see how the company's projected revenue gains in 2014 can spread into 2015 and beyond.
Action to Take -- > Investors should stop penalizing this recent laggard, and push shares up to a range of 1 to 1.5 times forward sales, on an enterprise value basis. In the next six to nine months, shares might pierce the $3 or even $4 level, equating to 30% to nearly 75% upside from recent prices.
-- Buy ACLS up to $2.60
-- Set stop-loss at $2
-- Set initial price target at $3.40 for a potential 30% gain in six months
This article was originally published at ProfitableTrading.com
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