Nanometrics recorded strong earnings, but stock price underperformed

Nanometrics (NANO) reported stronger than expected quarter and full year results ending December 31, 2018. The full-year revenues for December 31, 2018 came in at US$324.5 million, which was an increase of 25 per cent over 2017, and outpacing the growth of the overall wafer fab equipment (WFB) industry, driven by over 60 per cent growth in memory products market, the Company noted.  the company’s outperformance was also bolstered by significant competitive wins and increasing market share. In 4Q FY 2018, foundry, IDM and other device sales rebounded more than 50% over Q3, setting the stage for a significant increase in sales expected from these markets for the forthcoming year.

A summary of the earnings results is shown below:

Source: Company financials

The Company has also recorded US$103.3 million in cash flow from operating activities (CFO) during FY 2018, and after capital expenditures of US$7.5 million, free cash flows (FCFs) came in at US$95.8 million, or 30 per cent of the revenues. There were no significant interest-bearing debts on the balance sheet as of end FY 2018, and its cash and cash equivalents balance stood at US$110.95 million, up from US$34.90 million in FY 2017.

The Company is trading at a historical trailing tweleve months (TTM) price-earnings (P/E) multiple of 12.79 times, and a forward P/E of 13.15 times. The following is a summary of the share price multiples shown below:

Source: Yahoo! Finance (February 08, 2019)

Despite the robust earnings report, share price still underperformed

Source: Yahoo! Finance (February 08, 2019)

Despite the latest earnings report, the stock could not bypass the US$30 psychological level at was last traded at US$29.06 as of February 08, 2019.

Taking a look and comparing Street’s estimates

Source: Yahoo! Finance (February 08, 2019)

With average expecations of top and bottom-lines for FY 2018 at US$320.15 million, and US$2.25 per share respectively, the Company have beaten both estimates for FY 2018.

The Company has also put out its earnings expectations for 1Q FY 2019 for March 2019, and it stated the following:

Management expects first-quarter 2019 revenues in the range of $62 to $68 million. Gross margin is expected to be approximately 51.0%, plus or minus 1%, on a GAAP basis and 53.5%, plus or minus 1%, on a non-GAAP basis.  Management expects first-quarter operating expenses to range between $28.0 million and $29.0 million on a GAAP and non-GAAP basis, and earnings in the range of $0.09 to $0.20 per diluted share on a GAAP basis and $0.16 to $0.27 on a non-GAAP basis.”

A look at the earnings expectations by the Street’s estimate showed that the average revenue and GAAP EPS estimates for 1Q FY 2019 are around US$72.0 million and US$0.41 and thus this has fallen short given what was noted in the earnings outlook.

The shortfall in the 1Q FY 2019 earnings outlook might have explained the stock price underperformance following the release of their full year financials earlier in the week.

What to expect in the near-term and going forward

While the stock price of NANO did underperform due to an underwhelming earnings outlook, the low to competitive price valuations appears to be one of the key drivers for the continued enthusiasm over the overall fundamentals. Moreover, the Company has a reasonably good cash standing, and has no significant interest-bearing debt. This might prove critical during periods of extreme downside stress that might impact the overall economy and industry.

However, its exposure to the technological sector as mentioned in their latest earnings statement where a majority of the revenues are derived from wafer fab equipment continues to pose cyclical fluctuations and investors do need to pay attention to the constant shift in demand and supply conditions impacting the wafer fabrication equipment industry and overall technology sector.

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