Ultratech Shares in the Spotlight

 | Apr 23, 2013 | 10:30 AM EDT
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According to a 13G filed with the SEC, Adage Capital Management owns 1.2 million shares of Ultratech (NASDAQ:UTEK), a manufacturer of equipment and tools used by semiconductor manufacturers. Ultratech has a market capitalization of about $800 million (on average over 300,000 shares are traded per day).

The current stock price is about $30, making for plenty of daily dollar volume. Adage now owns 4.6% of the total shares outstanding, suggesting that the fund might actually have built up a larger position -- large enough to cross the 5% threshold -- and has since sold a portion of its stake. The fund's 13F filing for the end of December 2012 showed that it then owned about 880,000 shares, after having nearly tripled the size of its position during the fourth quarter of the year.

Ultratech dropped nearly 20% on April 18 after narrowly missing earnings expectations for the first quarter, significantly missing on revenue and on an uncertain outlook for the year. Revenue and earnings per share were actually up vs. a year earlier.

According to the financial release, sales rose by 22% and earnings per share came in at 48 cents for the quarter compared to 38 cents. Considering the current stock price, that actually makes for a decent valuation on the surface. The trailing earnings multiple looks to be 17 and annualizing the most recent quarter results in a price/earnings ratio of 16. After the fall in the stock price, Ultratech is down 7% for the year against a rising market.

In the past few quarters, Ultratech has generally reported EPS numbers in line with analyst consensus, rarely off by more than a few cents. Although management's outlook for the year has probably not been incorporated into forecasts yet, the sell-side is calling for $1.97 in earnings per share for 2013. From that point, the company is expected to further improve its bottom line, with the result being another double-digit percentage increase in EPS in 2014 to $2.33. Hitting that target would give the stock a forward price-to-earnings multiple of 13 at current prices. At that level, the stock would need very little growth  in order to be fairly valued and certainly would be a potential value play if it continued to deliver strong growth.

The recent quarterly report has shown some internal concerns over how well Ultratech will perform this year. We would note that the company has significant cash on hand, making up a good chunk of its market capitalization.

One potential peer for Ultratech, in that it produces equipment used to manufacture semiconductors, is Lam Research (NASDAQ:LRCX). Lam's net income plummeted in its most recent quarter compared to the same period in the previous year, though revenue was actually up over the same time frame by 47%. Wall Street analysts expect the company to recover on the earnings front over the next couple years, and as a result the stock trades at a small discount to Ultratech on a forward earnings basis.

It's possible that the potential problems that Ultratech's management is experiencing could affect Lam as well, though that company is significantly larger in terms of market cap with a valuation of $6.8 billion.

Ultratech's valuation does not look too bad, and while the company did fall short of expectations for the first quarter, it did still report considerable growth rates that normally might make it worth considering at current levels.

We would be concerned enough, however, about the outlook that the stock should probably be avoided at least now. Investors in the industry could consider Lam Research, though forecasts might want to err on the side of conservatism in case Ultratech's uncertain next few quarters are because of broader trends in semiconductor manufacturing.

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