MKS Instruments Soars On Earnings!

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Investors had already bid chip stock prices up in anticipation of the recovery.  I couldn’t find a single one with both high growth potential and a misvalued stock price.  (Long time readers know these are the two key elements I look for in a stock.)

That’s when I decided to take a close look at the chip equipment makers.  I was very excited by what I found.  A number of them were still trading at “cheap” valuations.

I knew if chip makers were recovering sharply, a similar recovery in chip equipment makers couldn’t be too far behind.  With a little digging, my instincts were confirmed.

I found North American chip equipment makers posted a huge 24% increase in order bookings in January 2010.  And, they were three times higher than the year ago period.

Sharply rising order bookings mean growing revenues in coming quarters.

What’s more, the industry’s trade association had recently forecasted strong growth for this year and next.  They’re expecting chip equipment sales to grow a whopping 53% in 2010 and 28% in 2011.

The trend’s continuing...

Order bookings increased in both February and March 2010.  And, they’re now back to levels last seen at the industry’s peak in 2007.

Confident the industry had indeed turned the corner, I began focusing on individual chip equipment companies.  MKSI immediately stood out from all the rest.

First of all, they make equipment for manufacturing cutting edge technology products in high demand.  Their equipment is a key part of the process for making items like flat panel displays, solar cells, and data storage media.

A quick scan of MKSI’s customer list revealed they would be right at the center of the industry recovery.  The company’s customers are the industry’s leaders such as Applied Materials, Lam Research, and Novellus Systems.

What really sealed the deal for me was the stock’s valuation relative to the company’s growth potential.  At around $19, MKSI was trading at just 10x analysts’ 2010 estimate of $1.80 per share.  A very low P/E for a company expected to grow earnings 20% a year over the next five years.

I could see the shares easily trading up to $36 over the next 12 months.  That was potential upside of 89%!  Not too shabby.

With the company’s blowout first quarter numbers (just out this morning), my forecast is looking more and more certain.

Revenue jumped 158% year over year to $198.1 million (handily beating analysts’ estimate of $180 million).  And, earnings soared to $0.58 per share from the year ago loss of ($0.34).  (EPS beat soundly beat analysts’ estimate of $0.49.)

Beating analysts’ estimates was no small feat.  Within the last few months, the consensus estimate had more than doubled!

What’s even more impressive are the increases over fourth quarter numbers.

Revenue increased by a stunning 33%.  Net income soared a whopping 96%.  And, earnings per share bolted 93% higher.  These are huge sequential quarterly gains.

And, all signs point to more growth in the months ahead.

As you can imagine, MKSI is soaring today on the news.  Shares are trading at $23.86 as I write.  That’s 25% higher than where they were when I recommended them.  Not bad for little over a month in the trade.


Best of all, it’s not too late to climb aboard.

The shares still offer 52% upside to my price target of $36.  And, since the recovery is looking stronger than even my optimistic assumptions, I wouldn’t be surprised if the shares ultimately blow through my target.

Take a closer look at MKSI for your own portfolio.  Fast growing companies trading at a nice discount are hard to find in this market.  Don’t let this one slip through your fingers.

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