A 13G filed with the Securities and Exchange Commission has disclosed that Steelhead Partners, a fund managed by Michael Johnston, owns 1.8 million shares of Rudolph Technologies (RTEC), a manufacturer of defect-inspection instruments used by chipmakers to improve quality. Rudolph's market capitalization is only about $450 million, but between the average daily volume of about 260,000 shares and the current share price of nearly $14, there is sufficient dollar volume for most investors.
Steelhead, according to the filing, owns 5.2% of the company's outstanding shares. Our database of 13F filings shows that the fund did not own any shares at the end of September.
In the third quarter of 2012, Rudolph's revenue was up 49% from the same period in 2011. While this growth rate seems to somewhat overstate the strength of the company's recent performance, it was also a substantial improvement from average sales per quarter in the first half of the year. Pretax income roughly doubled in the third quarter of 2012 from a year earlier, though a higher provision for income taxes brought earnings growth down to 26%.
This is an impressive improvement on the bottom line, even more so because an increase in the effective tax rate is obviously unsustainable. This means that future improvements in pretax income should carry earnings increasingly higher. Some of this earnings growth may have been helped by an acquisition, but Rudolph's 10-Q states that the acquisition did not materially affect operations, so we'd assume that much of the earnings growth, if not most, was organic.
Rudolph had $301 million in current assets at the end of September, including more than $170 million in cash, cash equivalents and marketable securities, and only $108 million in total liabilities. This means that a sizable share of the company's market cap is excess cash, so the trailing price-to-earnings ratio of 22 is not as high as it sounds.
The third quarter of 2012 was a particularly strong one for Rudolph. If we annualize the company's $0.20 per share in earnings for the quarter instead of using the trailing figure, we get a P/E multiple of 17. That assumes that the third-quarter performance is representative of what Rudolph will do going forward, and that might not be entirely accurate. Analyst estimates for 2013 imply a current-year P/E of 16. Again, these multiples are for a company that holds a sizable cash position and has delivered impressive performance in recent quarters.
Taking a slightly deeper dive into the business, we see that the core inspection business was the primary source of Rudolph's revenue growth, and it is now responsible for over two-thirds of sales. Geographically, Taiwan has become the largest geographic market, and other Asian geographies and the U.S. remain strong markets.
The company has reported some customer concentration: In the first nine months of 2012, the top three customers were each associated with 10% to 12% of revenue. Still, this means that Rudolph could lose even its largest customer entirely, fail to replace it and still have significantly higher sales than it did in the third quarter of 2011. As for the company's cash, Rudolph produced positive cash flow from operations in the first nine months of 2012, and it used about half of that for its acquisition. The primary use of cash seems to have been working capital, so we're not sure why the company bothers to keep so much excess cash.
Since Rudolph pays no dividend and has had no recent share repurchases, we wouldn't count on it to return this cash directly to shareholders. We suppose that this practice gives the company the means to expand if it so chooses, and the size of the cash position at least demonstrates that management does not just grow for the sake of growth. The disposition of cash has a strong potential to affect the valuation, so we're curious about what choices management will make there. Aside from that point, investors could certainly consider the stock on its fundamentals.