Canon's Valuation Reflects Serious Concerns About Growth And Margins

Dividends aren’t the be-all and end-all of a company’s quality, but I would still argue that Canon’s (NYSE:CAJ) first dividend cut in 33 years is a pretty accurate reflection of the ongoing challenges at this Japanese conglomerate. Despite a high level of ongoing R&D, Canon’s revenue has fallen over the last five, 10, and 15 years, and the long-term average FCF margin has been basically static, as management hasn’t moved aggressively enough to transition more of its businesses to “cash cow” status.

Canon is not without hope – I see worthwhile potential in businesses like commercial printing, medical, and nanoimprint lithography – but the company’s ability to execute is in serious doubt. The shares do look undervalued today, but absent more dramatic progress on cost-cutting, I’m concerned this will be a value trap for investors.

 

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Canon's Valuation Reflects Serious Concerns About Growth And Margins

Seeking Alpha: For Ultratech The Story Remains 'Ready, Set... Wait!'

The wait goes on at Ultratech (UTEK), and it's not a particularly pleasant one for investors (nor, I imagine, the company's executives and employees). Management noted increased quoting activity for LSA systems and continues to expect orders and shipments to materialize soon, but investors are left in a frustrating grey zone wondering when foundries will make their orders and how the annealing market will shake out between Applied Materials (AMAT), Ultratech, DNS (OTC:DINRY), and Mattson (MTSN).

Ultratech's first quarter results do offer a reminder that the company has other credible business lines, including advanced packaging and tools for high brightness LED manufacturing, but it is the ramp in laser spike annealing tools that will make or break the stock in the near term. Ultratech could still trade into the $30s from here, and investors are now only a quarter or two away on better visibility into this next round of annealing tool orders.

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For Ultratech The Story Remains 'Ready, Set... Wait!'

Seeking Alpha: Waiting For Ultratech, Or Waiting For Godot?

The difficult wait at Ultratech (UTEK) goes on, as investors are growing restless with the lack of much-needed laser spike annealing orders. While I still believe that Ultratech has very competitive technology in this market and that LSA is going to be vital to sub-20nm chip production, that belief is being tested in the face of poor ordering results. In the meantime, growth in the advanced packaging, metrology, and ALD is nice to see, but not enough to drive the stock.

Recreating the company's past market share in LSA in this next generation of chips would still make this a stock very much worth owning. I would also point out that the company has nearly $10 a share in cash on the balance sheet on a fully-diluted basis. It must be said, though, that Ultratech is getting very close to that "put up or shut up" point where talking about technology and revenue potential feels pointless in the face of relative performance data from Applied Materials (AMAT), Dainippon Screen (OTC:DINRY), and perhaps Mattson (MTSN).

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Waiting For Ultratech, Or Waiting For Godot?

Seeking Alpha: Ultratech Has To Deliver The Orders This Year

Tech investors may have short memories, but they are quick to punish companies that cannot deliver the goods when it comes to growth. Ultratech (UTEK) has most definitely been a disappointment over the past year, as enthusiasm over the odds of the company seeing its laser spike annealing tools adopted into advanced semiconductor nodes has given way to the reality of significant share loss at the 20nm (most likely to Dainippon Screen (OTC:DINRY)).

Amidst that disappointing backdrop of 2013, the shares have rallied about 20% in recent months. Multiple factories have made LSA the process of record in their 16nm/14nm nodes, and most factories are looking at LSA at multiple steps - increasing the overall addressable market. The key question, though, is whether Ultratech can beat companies like Applied Materials (AMAT) and get the orders and rebuild its share. I'm still bullish on these shares (and still an owner), but for all of the interesting potential in areas like advanced packaging, LEDs, and metrology, it will be the LSA orders in 2014 that really move this stock.

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Ultratech Has To Deliver The Orders This Year

Seeking Alpha: Can A Commercial Rebound Rebuild ARC Document Solutions?

The multi-year decline in commercial construction has been particularly painful for ARC Document Solutions (ARC) (formerly known as American Reprographics). Despite having the only national reprographic services business in the country and five to 10 times the market share of its closest competitor, revenue in 2012 was only 40% of what it used to be in 2008 as the company's core architecture/engineering/construction market has gone into deep hibernation.

Although I've been writing on companies that I believe can leverage improving construction activity into higher share prices, I'm not completely sure where ARC Document fits into that group. I updated my research and models on ARC hoping to find an overlooked potential gem, but I'm just not sure that's what this is. The reprographics industry is changing and I'm not confident that the margins in the managed print services business will come close to what the company has achieved in the past. Although I can construct a bullish argument that would put ARC Document's potential fair value into the double-digits, my base-case assumption is much lower and not as much of a bargain relative to today's price when factoring in the risks of the company's changing business and end-markets.

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Can A Commercial Rebound Rebuild ARC Document Solutions?

Investopedia: HP Still Looks Cheap, But Execution Issues Are Part Of The Reason Why

There's a big difference between “cheap” and “cheap for a good reason”, and it's not always easy to tell the two apart. While Hewlett-Packard (NYSE:HPQ) shares still appear to be undervalued on the expectation of any growth at all, the ongoing execution issues do mean that a return to growth shouldn't be taken for granted. At a minimum, there's still quite a lot of work for management to do make this turnaround a success, and I do have my concerns about the the effect of competition on those plans. On the other hand, today's valuation doesn't exactly presume that those efforts will end in major success.

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Seeking Alpha: Ultratech Ultrainteresting

While a very strong year for the stock has propelled Ultratech (UTEK) above $1 billion in market cap, this is still far from a household name in semiconductor equipment. That could still work in investors' favor, as Ultratech addresses several appealing markets with above-average growth potential. Although valuation does look a little stretched, waiting for this stock to get meaningfully cheaper could be in vain as it offers a clean balance sheet, solid growth prospects, and leverage to improving capital spending in the chip space.

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Ultratech Ultrainteresting

Investopedia: ASML And The Obvious - Weak Trends And A Bid For Cymer

In contrast to Applied Materials (Nasdaq:AMAT), which has repeatedly made moves and comments that have left investors scratching their heads, ASML (Nasdaq:ASML) continues to operate and report along highly predictable lines. Although there's evidence that industry conditions are even weaker than previously supposed, ASML didn't really surprise with its third quarter earnings, nor its announcement that it's acquiring Cymer (Nasdaq:CYMI). What is frustratingly less obvious, is what constitutes a fair price to pay for ASML today.

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Investopedia: Growing Niches Should Propel Ultratech Higher

Niche markets are often spoken of poorly, as they don't typically offer the sort of huge addressable revenue opportunities that tech investors value. In the case of Ultratech (Nasdaq:UTEK), however, I wouldn't be so quick to dismiss the company as just a niche player. With opportunities to expand the utilization of market-leading tools for advanced packaging, laser annealing and LED production, Ultratech could be looking at several years of above-market growth or a takeout offer.

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Investopedia: Is Moore's Law Fueling Intel's Investment in ASML?

Maybe the corporate world's never-ending capacity to surprise is what has kept me so interested in the equity markets for over 20 years. In the latest example, Intel (Nasdaq:INTC), a company famous for playing suppliers off each other and encouraging/supporting small up-and-comers, is taking a significant stake in lithography equipment maker ASML (Nasdaq:ASML) and agreeing to help fund the company's R&D efforts. While this is an unusual deal in many respects, it seems to acknowledge (if not cement) ASML's market leadership, as well as the challenges of continuing to push the leading edge of chip development.

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Investopedia: American Reprographics Still Waiting For The Commercial Recovery

Here and there, investors are already seeing certain stocks recovering on the expectation of improving commercial construction activity. To a certain extent, American Reprographics (NYSE:ARC) has been one of them, as the stock has rebounded significantly (on a percentage basis) from its lows in the fall of 2011. That said, there looks to be plenty of opportunity left in these shares if recent signs and portents really do mean that better commercial building activity is on the way.

The Basics
American Reprographics is the largest company in the reprographic services industry, with somewhere in the neighborhood of 15% market share. In fact, because there are so few competitors of any size (ARC is about 10 times the size of its largest competitor), it's actually a little difficult to calculate how much share they have - particularly since the multi-year downturn in commercial building activity has pushed many small companies out of business entirely.

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Investopedia: Cymer Still A Leading Light

Normally, large market share would sound like a golden ticket for shareholder returns. It's not so simple when it involves the semiconductor equipment industry, and Cymer (Nasdaq:CYMI) has proven to be just as cyclical as customers like ASML (Nasdaq:ASML) and other equipment companies like Applied Materials (Nasdaq:AMAT). With the photolithography industry on the cusp of both a rebound in demand and a major new technology cycle, investors may want to revisit this story.

The Big Dog in a Critical Step
Photolithography is an essential step in the manufacturer of semiconductors as the light source imprints the circuit pattern on the wafer. What's more, increasingly sophisticated light sources and photolithography machines have helped make Moore's Law a reality and enabled increasingly complex chips.

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Investopedia: ASML Seeing Light At The End Of Semiconductor Tunnel

Lithography specialist ASML (Nasdaq:ASML) isn't a typical semiconductor equipment company. ASML owns a significant share of its market and has actually seen prices strengthen over the last decade, while most equipment companies have gone the other route. With ASML's equipment occupying a key space in chip fabrication, investors may well see management's strong guidance as a sign that the semiconductor industry really is on track to rebound in 2012.

A Strong End to the Year  
Although ASML did report both sequential and annual declines in revenue for the fourth quarter, results were nonetheless better than analysts had expected. Revenue fell 17% from the third quarter, but was about 7% above the average analyst estimate. For the quarter, ASML saw system unit sales fall 24% to 41 units.


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Investopedia: Hewlett-Packard Presses The Reset Button

It stands to reason that a change in executive leadership, particularly when that new CEO is brought in from outside the firm, is going to lead to significant changes in how a company operates. After all, why would a new CEO want to risk losing the honey pot that is a Fortune 500 pay package, as a consequence of the prior CEO's mistakes? To that end, then, Hewlett-Packard (NYSE: HPQ) shareholders should be in for a stretch where the company reports some kitchen sink quarters, tries to clean up past mistakes and forge a new path to better performance.

A Sluggish End to the Year  
HP didn't report a very strong quarter to close its fiscal year, but there is no particular reason that anyone should have thought it would. Revenue declined 3% from last year, but did rise 3% from the third quarter, missing consensus by a small amount. Software was the only operating area of notable growth, as HP posted a 6% improvement in organic sales. Services wasn't great, up 2%, but that was better than servers/networking/storage, PCs and printing, which were all down from last year.

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Investopedia: ASML Sounding The Bottom?

Whither ASML (Nasdaq:ASML) goest? The answer is "more or less wherever memory is going." For now, that means bad news for ASML as companies have significantly pulled back on their capex spending. Eventually, though, these manufacturers will come back and ASML will see the order book swell again.


A Third Quarter That Was Slightly Better Than Expected
Analysts had been looking for a fairly unimpressive quarter from ASML and they were basically right, though ASML did do a little better than hoped. Revenue rose 24% from last year, but fell 5% on a sequential basis. Shipments fell 13% sequentially, with new unit shipments down about 21%.

ASML boasts significant operating leverage and that profitability cuts both ways. Gross margin slid about three full points from the second quarter, while operating income fell 18%.


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Investopedia: Go With Uncommon Sense On ASML

Normally it would not take much work to justify buying the stock of a company whose revenue grew 43% in the last quarter and trades at a reasonable valuation. But ASML (Nasdaq:ASML) is a semiconductor equipment company, and this is a sector where investors' heads are always twisted to the future - a future that looks to have significantly fewer orders in the short term. Still, long-term investors who can weather a down period in the cycle should seriously consider adding shares of one of the best-positioned equipment companies in the space. 

A Good Second Quarter, But Nobody Cares  
ASML reported that second quarter revenue rose 43% from the year-ago level and a little over 5% from the first quarter, a level of performance that exceeded the consensus analyst guess. While shipments were basically flat, the company did see an uptick in the average selling price (both on a sequential basis). Better still, margins were solid - the company saw gross margins improve 40 basis points sequentially and the operating margin improved by more than a full point as the company logged close to 10% sequential growth. (For related reading, see Analyzing Operating Margins.)

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Investopedia: Would A Smaller HP Be A Better HP?

Summer is the time for idle rumors and speculation around the market, mainly because there's so little real news out there that nobody will be too hard on any new idea that floats by (hey, at least it's something to talk about). Prior to the Fourth of July holiday, the markets were briefly abuzz with the idea that Hewlett-Packard (NYSE:HPQ) should bow to pressure and split up some of its operations. Although it is probably not too likely (CEOs like to run bigger businesses, not smaller), it is an idea that is still worth exploring. 


Everything Old is New Again
This latest round of "how to make HP better" chatter is reportedly coming from a consortium of private equity groups (Blackstone (NYSE:BX), KKR (NYSE:KKR) and TPG Capital). While specifics are lacking, this group has noted the relatively poor valuation on HP's stock and suggested that the company could benefited from a strict diet - getting rid of the PC business and perhaps the printing unit as well.

Investors should realize, though, that this is not the first (or the likely the last) time such a move has been suggested. Journalists and commentators penned plenty of pieces in the wake of former CEO's Hurd messy departure that suggested HP should take that opportunity to become leaner and more focused. Going back even further, Merrill Lynch analyst Steven Milunovich penned a note in 2004 that recommended HP split in two, creating a consumer-focused company and a business/enterprise-focused company. 



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Investopedia: Demand Versus Doubt With ASML

Bulls and bears have answered their respective calls to arms and are really going at it in the semiconductor and equipment sectors. On one hand, Apple (Nasdaq:AAPL) can't seem to find a saturation point for iPhones and iPads, and follow-on offerings from the likes of Samsung are also doing well. Everywhere you look there are more and more chips going into more products and consumer spending has picked up nicely from the depths of the recession. 

On the other hand, the Tohoku earthquake has thrown the production side of chips into chaos. What's more, there's the twin notions of "sell in May and go away," and the idea that chip and equipment stocks have already had their runs and are due for a run of underperformance.

That is the scenario swirling around ASML (Nasdaq:ASML) these days, as the world's leading lithography 

equipment company reports its earnings.

An OK Quarter to Start the Year 

Given the push-pull surrounding the industry maybe it's only fitting that ASML's results would be a mix of good and bad news. On the positive side, ASML's reported sales were a little bit ahead of expectations. Sales dropped 5% from the fourth quarter, but nearly doubled on a year-over-year basis, as shipments slipped a bit but prices stayed strong. (For more, see Everything Investors Need To Know About Earnings.)

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Investopedia: Today's Xerox Not Just A Copy Of The Past

Institutional Wall Street is a funny place. Not only do these highly educated professionals badly misuse words like "catalyst" on a routine basis, but they cannot seem to decide what they really want. Companies are under near-constant pressure to convince the Street that they can find new sources of growth and continually transform their business to stay current with the markets. On the other hand, when a company is actually in the midst of a transformation, a lot of investors flee to the hills and wait for a "catalyst" to return.

That would seem to be the case for Xerox (NYSE:XRX) today. Although the company has gone to considerable lengths to build a process outsourcing and IT outsourcing business to counterbalance the tradition printing/copying business, Wall Street seems to still talk about them primarily as an old-line, slow-growth machinery company.

The Quarter That Was  
To some extent, Xerox is not doing itself a lot of favors in shaking up that image. Although reported revenue growth came in at 42% this quarter, organic growth was more on the order of 2%, as the company's "technology" business (that is, printers, copiers and the like) was basically flat versus last year.

More positively, there was some improvement in profitability. Gross margin came in at 33.6 for the quarter, and operating margin expanded about one full point on a pro forma basis. Better still, bookings in the service business were up 13% on a very difficult comp.

At What Pace Change?
Unfortunately, management guided earnings down a bit for the first quarter and did nothing to really encourage analysts or investors to expect a much better 2011. So even though the company has products like the iGen3 that leave it in good shape as the market moves to digital printing and is also targeting small and mid-sized businesses more than before, it is going to be a slow road to progress. 


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