Sometimes all it takes is one decent quarter in order for the markets to start paying attention to a forgotten, off-the-radar name. That's what happened last month with laser-based manufacturing solutions name Electro Scientific Industries (ESIO) , one of the 20 names that comprise my 2017 Double-Net Value Portfolio, and the one that somewhat surprisingly has emerged as the top performer within that group, up 43% year to date
Electro Scientific Industries had fallen on hard times the past few years as revenues declined and profits dried up; the company has not had a profitable year since 2012. Typically cash-rich, that hoard declined from $176 million in 2012 to the current $62 million as the company began burning through it. Book value per share also took a huge hit, falling by two-thirds during the same period.
In February, the stock enjoyed a small bump after reporting a slightly lower-than-expected third-quarter loss, along with a corporate restructuring plan that was intended to reduce costs by $10 million to $12 million annually and ultimately allow Electro Scientific Industries to operate at breakeven on an EBITDA basis at $35 million in quarterly revenue. That news was followed by a better-than-expected fourth quarter, in which the company handily beat consensus earnings estimates; it reported non-GAAP earnings per share of nine cents, well above the expected five-cent loss, and revenue of $49.9 million versus the $42.7 million consensus. That was good for a 14% jump in the stock, which now trades at levels not seen since 2014.
Following the jump in stock price, ESIO now trades at just over 3x net current asset value and ended its latest quarter with $62.3 million, or $1.88 per share, in cash and short-term investments and $14 million in debt. Consensus estimates are looking up; the three analysts covering the stock have Electro Scientific Industries earning 15 cents per share in 2018, then 34 cents the following year. (Granted, that is a small consensus.)
If nothing else, Electro Scientific Industries is a great example of a company that, despite declining revenue and earnings, has managed to muddle through due to a strong balance sheet that is relatively loaded with cash. The market has started to take notice, but this is not yet a settled situation. The company now must deliver on cost reductions and a sustained return to profitability, or it once again will fall off the radar.