Rudolph And Nanometrics Hoping To Unlock A Little M&A Synergy Magic

As the complexity of chip design continues to intensify, it's requiring more and more R&D from semiconductor equipment companies to keep pace, and that is making scale a more significant competitive factor - memory, foundry, and logic companies want "partners" (and yes, I use quotations deliberately there) that they can trust to deliver the goods, and that's making it harder for small players to stay in game. To that end, the combination of Rudolph Technologies (RTEC) and Nanometrics (NANO) announced earlier this week certainly makes some sense as a way for both companies to stay competitive in the process control/metrology/inspection markets they serve.

Whether the two companies will achieve their synergy goals from the deal is, of course, an open question now. The expense synergy targets look reasonable at first blush, but integrating operations will still offer challenges and the revenue synergies may prove harder to achieve than it would seem at first blush. For me, this is a "don't love it, don't hate … but I get it" sort of transaction, and the new Rudolph (the surviving entity) will be a name worth watching as the semiconductor equipment (or SCE) space recovers.

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Rudolph And Nanometrics Hoping To Unlock A Little M&A Synergy Magic

Rudolph Technologies Growing Into Expanding Markets, And Priced Fairly

Against a backdrop of generally weakening sentiment, Rudolph Technologies (RTEC) has been a bit of an outlier in the semiconductor equipment space. Up almost 30% over the last year, and over 20% year to date, Rudolph is solidly ahead of peers/rivals/comps like KLA Tencor (KLAC), Lam Research (LRCX), Applied Materials (NASDAQ:AMAT), Nova Measuring (NVMI), and SUSS Microtec (SMHN.XE). What makes that a little odd is that although the company has been steadily growing its addressable market, its revenue growth hasn't been all that outstanding on a peer-to-peer basis and its product exposures (RF, etc.) could be a vulnerability.

Rudolph has done a little better than I'd expected back in 2016, but compared to a stronger equipment environment than I'd expected the "net outperformance" hasn't been all that significant. Although I do like Rudolph's prospects for leveraging ongoing demand for advanced architectures and packaging, as well as its prospects to sell lithography stepper tools into the OLED space, the valuation seems pretty fair at a time when the overall sector is looking pretty wobbly.

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Rudolph Technologies Growing Into Expanding Markets, And Priced Fairly

Veeco Instruments Battered As Doubts Mount

This has been a lousy year for Veeco Instruments (VECO), as this supplier of tools for the LED and semiconductor markets has seen its share price cut in half on repeated earnings disappointments, an unexpected litigation outcome, and growing worries about the company's long-term margin and growth leverage. While the acquisition of Ultratech earlier in the year achieved the company's goal of diversification, it seems to be coming at the cost of even more volatility and uncertainty in the business.

I can see some upside in the shares from here, but it's not clear to me that it is worth the hassle and the risk. Veeco is going into 2018 with a strong backlog, but the MOCVD market could be approaching a near-term peak and serious emergent competition is eroding margins. In the advanced packaging and semiconductor businesses, Ultratech's historical volatility is continuing and there are no guarantees on the timing or magnitude of LSA or packaging-driven growth.

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Veeco Instruments Battered As Doubts Mount

The Ultratech Two-Step Continues

Although the market has cooled a bit on semi equipment names in recent months, Ultratech (NASDAQ:UTEK) continues to be its own worst enemy as revenue and order growth remain frustratingly erratic. On the positive side, the company enjoys a strong presence in advanced packaging and the support of major customers like Taiwan Semiconductor (NYSE:TSM), and it does seem as though the company's LSA tools are getting another look at 7nm and 10nm nodes. On the negative side, competition remains a real threat and it just seems like management cannot get this business on a steady trajectory.

A fair value in the mid-$20's is still valid assuming ongoing order growth in advanced packaging and 28nm laser annealing, with growth in inspection, nano, and sub-28nm annealing more of a "it'd be nice if it happened..." While the company does have over $9/share in cash on the balance sheet, it may be difficult for management to translate that into a meaningful M&A transaction.

These shares continue to have that "if they just get out of their own way" potential, but I can't argue that investors should favor this name over other equipment companies like Advanced Energy (NASDAQ:AEIS), Rudolph (NASDAQ:RTEC), and Orbotech (NASDAQ:ORBK) given the consistent inconsistency.

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The Ultratech Two-Step Continues

Ultratech Grinding Out Progress

Credit where due, Ultratech (NASDAQ:UTEK) has finally been rewarding some investor patience. Almost anybody who bought in the last two years is in the black now and three-year holders should start feeling a little more encouraged. Orders are following the upward trend across the industry and there is at least a plausible chance that Ultratech can recapture some of the momentum it lost in sub-28nm nodes as the industry starts moving to 10nm, 7nm and 5nm.

It's also worth noting that despite management's objections, there has been a change in the board of directors. Hopefully this will be a change for the better, but this remains a brutally cyclical business and extremely competitive. At this point, Ultratech doesn't seem undervalued, but owning a fairly-valued highly cyclical company enjoying a cyclical recovery in business isn't the worst thing in the world, as outperform could push estimates, sentiment, and multiples higher in the coming quarters.

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Ultratech Grinding Out Progress

Seeking Alpha: Rudolph Technologies Riding Powerful New Chip Trends

The semiconductor industry is a tough place to play, but the semiconductor equipment industry is even worse, as the cycles swing even higher and lower, and as the timing of orders is difficult to predict (and can have huge impacts on the stocks in the meantime). What's more, you're talking about an industry where the key customers are keenly focused on trying to improve their own free cash flow, leading to a "do more with less" philosophy with equipment than can pressure suppliers.

What's the best defense? A good offense, or in this case, compelling technology and products that offer end users real advantages in throughput, production costs, and/or total cost of lifetime ownership. Rudolph Technologies (NYSE:RTEC) is trying to bring new technology to areas like advanced packaging, inspection, and metrology and use it to leverage real growth in new packaging technologies and RF and MEMS production.

While I'm an owner of Ultratech (NASDAQ:UTEK), a Rudolph competitor, I do think Rudolph's valuation is interesting. Product acceptance/adoption, order timelines, underlying demand for chips, and competition are all real issues (and difficult to forecast in their own right), but I believe mid-single digit revenue growth over the long term and peak margins in the mid-to-high 20%'s can justify a fair value in the mid-to-high teens today, with upside into the $20s if things go well.

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Rudolph Technologies Riding Powerful New Chip Trends

Seeking Alpha: Ultratech Still Predictably Unpredictable, But Orders Are Improving

Ultratech (NASDAQ:UTEK) is never going to be Honeywell (NYSE:HON) or Coca-Cola (NYSE:KO), so if you're looking for a consistent, predictable company without a lot of quarter-to-quarter surprises, please look elsewhere. What Ultratech does offer, though, is leverage to what looks like an improving semiconductor order cycle, as well as leverage to specific drivers like advanced packaging for logic chips, 3D metrology, and perhaps the ongoing move to smaller FinFET nodes.

These shares have done pretty well since my last write-up, with Ultratech's roughly 20% move ahead of the SOX Index (up about 12%), though not as strong as the 25% move at Applied Materials (NASDAQ:AMAT) and Rudolph (NYSE:RTEC). Valuation remains tricky; if the company could regain the 20%-plus operating margins and 15%-plus FCF margins of prior upswings, there would still be upside, but UTEK faces a lot of competition in its key markets, and there are legitimate questions about its ability to execute.

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Ultratech Still Predictably Unpredictable, But Orders Are Improving

Seeking Alpha: Steady Progress Still Elusive For Ultratech

The past year wasn't a great one for the semiconductor equipment industry, and in fact Ultratech's (NASDAQ:UTEK) 2% rise over the last twelve months puts it on pretty high ground compared to rivals like Mattson (NASDAQ:MTSN) (down 30%), Rudolph (NYSE:RTEC) (down 7%), and Screen Holdings (OTC:DINRY) (down 2%), as well as other industry bellwethers like Applied Materials (NASDAQ:AMAT) and ASML (NASDAQ:ASML). That comes despite a disappointing run of performance that saw a 1% drop in full year-over-year revenue and two straight top line misses to end the year.

This remains what it has been for some time - an increasingly speculative story predicated on improving orders for the company's advanced packaging, laser processing, and wafer inspection tools. While Ultratech clearly dropped the ball with respect to laser processing at sub-20nm nodes (or perhaps it is more fair to say that Mattson stripped it away), there may be some early signs of improvement, as well as the opportunity to leverage follow-on orders at 28nm and above.

If Ultratech can build on its three core businesses in 2016 and start outperforming, the shares could certainly move into the mid-to-high $20s, but investors have to at least consider the risk that companies like Rudolph and SUSS MicroTec (SMHN.XE) will do to Ultratech in advanced packaging what Mattson did in thermal processing and that the company fails to regain momentum with its laser processing business.

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Steady Progress Still Elusive For Ultratech

Investopedia: KLAC Looking To Click With The Current Chip Cycle

KLA-Tencor (Nasdaq:KLAC) has a lot of what investors ought to look for when shopping for stocks for their portfolio. The company is a leader in its space (with greater than 50% market share), posts excellent relative margins and continues to simultaneously re-invest in the business without being miserly towards shareholder capital.

All of that said, KLA-Tencor is a semiconductor equipment company and more than a decade of positive cash flow doesn't erase the cyclicality of this sector or this business. While ever-smaller circuits increase the demand for more sophisticated equipment, predicting the peaks and valleys of the cycle is notoriously difficult and investors have started to get a little more cautious.

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