Monday, February 03, 2014

Investing in Industrial Equipment Earnings Growth




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Newport Corporation (NEWP - Trend Report) bills itself as a "Global Leader in the Management of Light" which is a heavy way of saying they are in the business of Optics, Photonics and Lasers. A recent big beat and increase to guidance has helped make this stock a Zacks Rank #1 (Strong Buy) and it is the Bull of the Day.

Shine Your Light

One of the best things you can do to a financial portfolio is to be sure you are diversified. A sign in at the Chicago Mercantile Exchange denotes that sentiment by saying "Risk Not Thy Whole Wad" and this is an idea that is not lost on Newport.

Revenues from the products NEWP sells are spread pretty evenly over 5 large industries. They are Scientific Research, Life and Health Sciences, Microelectronics, Industrial, Defense & Security. None of those five segments accounts for more than 24% of total revenue.

The idea of diversification does not stop at it clients, it’s also prevalent in the geographies it serves. While the US accounts for the majority of sales (40%), Europe clocks in at 27% and the Pacific Rim also accounts for 26% of sales.

Company Description

Newport Corporation and its subsidiaries provide technology products and systems for scientific research, microelectronics, defense/security, life and health sciences, and industrial markets worldwide. Newport Corporation sells its products and services to original equipment manufacturers, end-user customers, and capital equipment customers through direct sales organizations, a network of independent distributors, and sales representatives, as well as through product catalogs and Websites. Newport Corporation was founded in 1938 and is headquartered in Irvine, California.

6 Beats and 1 Miss

Over the last seven quarters NEWL has seen 6 beats and 1 miss of the Zacks Consensus Estimate. The most recent quarter reported on 10/30/13 was an impressive one. The company posted earnings per share of $0.26, roughly $0.18 or 225% more than the Zacks Consensus Estimate of $0.08. That is a big beat. The stock moved higher by 7.9% in the session follow the report.

I guess investors might be used to some spectacular beats though. Just look at the positive earnings surprises over the previous four other beats. +41%, +65%, +66%. +44% -- respectively. That tells me that the analysts are having a hard time keeping up the story.

NEWP Estimates

Looking that the 2013 Zacks Consensus Estimate, I see a number that is all over the place. Maybe that is more evidence of the analysts having trouble with the underlying fundamentals of the business. In April of 2013, the Zacks Consensus Estimate stood at $0.98 and dropped by nearly 50% to $0.48 in August. But by October the number had moved higher to $0.56 and is now at $0.83.

The 2014 Zacks Consensus Estimate has also seen some volatility. The number was holding steady at $1.23 early in the year and hit $1.08 in June, only to bounce to $1.20 in July and then back to $0.99 by October. Since then the number has moved up to $1.12 and is now at $1.16. It seems the estimates are moving in the right direction.

Not So Short of Interest

Lately I have been keying in on stocks that could see a big short squeeze. That is not the case with NEWP, but it’s worth noting that the actual number of shares shorted continues to decline. This is not to say that the shorts are smarter than the longs, but as the stock has moved higher, there has not been much of a "line drawn in the sand"

Valuation

The valuation for NEWP is pretty solid no matter what metric you look at. The trailing and forward PE's are right in line with the industry averages of 20x and 15x respectively. The price to book multiple of 2.3x is well below the industry average of 4.7x. This is also the case for the price to sales multiple of 1.3x vs the 6x industry average.

Those numbers are nice, but when I look at the projected revenue growth for NEWP of 11%, I see it’s more than double the 5% industry average. Earnings growth, well that is even more impressive. NEWP is expected to see almost 40% earnings growth in 2014 compared to 27% for the rest of the industry. All this adds up to a stock that is fairly priced against the rest of the industry but should see much more revenue and earnings growth than its peers.

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