China does Orbotech a favor

Shlomi Cohen

Decisions by the Chinese government look like boosting Orbotech's sales substantially.

After many months of talk of a bubble developing in certain niche technology and biotechnology stocks, last week the inevitable correction, which really started at the beginning of the month, came about. This is the reason for the sharp, 2.8% weekly fall in the Nasdaq index, compared with a small decline in the S&P 500, and a slight rise in the Dow Jones.

The partial shrinking of the bubble was especially notable in shares of companies in smart Big Data solutions. Splunk (SPLK), for example, which touched a $106 intraday peak just a month ago, has since declined by a third to $71. Even at this price it is still bubblesome, with a market cap of $7.7 billion. This year's sales will be just over $400 million, and the bottom line is expected to be no better than breakeven.

Money exiting from bubble technology shares is returning, at least in part, to the Nasdaq veterans, which have suddenly become attractive thanks to low p/e ratios, nice dividends, and fat cash balances. And so last week, and from the beginning of the month as well, Apple (AAPL), Oracle (ORCL), Microsoft (MSFT), Intel (INTC) and Cisco (CSCO), have stood out against the trend.

Other stocks that have bucked the trend with outstanding rises in the same period are SanDisk Corporation (Nasdaq:SNDK), Orbotech Ltd. (Nasdaq: ORBK), and SuperCom Ltd.(Euronext:SUP; Bulletin Board:SPCBF).

The rise of nearly 3% in SanDisk on Friday is attributable exclusively to RBC analyst Doug Freedman, who reiterated his "Buy" recommendation while raising his price target to $100, two and a half weeks before the company releases results.

Freedman writes that SanDisk has a new technology called ULLtraDIMM that represents a significant breakthrough in SSD for data storage in large enterprises, and he expects it to contribute substantial revenue in the coming years. Already, a quarter of SanDisk's revenue derives from SSD for consumers and enterprises, so that, in the coming years, the sales of DiskOnKey and flash cards so strongly associated with the brand will become just a thin slice of the sales cake.

Orbotech rose 3.5% on Friday, and it has lately been demonstrating strength in a profit-taking market. It is very close to passing the $15 it last saw three years ago, when it took a turn southwards, reaching a low of $8 two years ago. With a third of its market cap represented by cash, and earnings per share expected to be $1.25 next year, giving a p/e ratio of 12, the risk is pretty low, assuming we are not in for another global crisis along the lines of 2008.

On the one hand, anyone who invests in Orbotech today gets interesting exposure to the Chinese market, where the government has recently made strategic decisions that favor what Orbotech has to offer. On the other hand, he gets exposure to the tablet, smartphone and television screen markets. In all three niches, technological changes are on the way, among them screen size, which will generate demand for Orbotech's inspection and production systems.

The Chinese government recently introduced a new policy of massive financial encouragement for local production and very broad R&D in semiconductors. Among the Israeli companies, Ceva Inc. (Nasdaq:CEVA); LSE:CVA) was the first to bag a significant agreement, with major Chinese semiconductor manufacturer SMIC, reported this month.

The decisions on semiconductors follow decisions in previous years, already implemented, to produce in China all televisions intended for the local market.

Following these decisions, Orbotech has become a leading vendor to the Chinese market, with advanced flat panel display inspection systems, in addition to it being a substantial vendor to the whole smartphone and tablet production chain at Chinese manufacturers, headed by those that supply Apple.

According to several analysts, the Chinese television manufacturers have recently been required to produce within China all televisions, including those for export, which will boost Orbotech's sales significantly. According to the analysts, the company is competing in tenders for inspection systems for six to eight new production lines that will be set up in China in the next three years.

To end with, SuperCom rose after reporting wins in government tenders worth over $25 million on Thursday. The contracts are apparently in one or more of the developing countries in which it operates. Most of the revenue will be recognized this year, but contracts of this kind can be expected to yield additional revenue in future years.

The writer serves as a consultant and investor in securities, and advises the Pia Select Nasdaq fund. This column should not be seen as advice or a recommendation to buy or sell securities, including securities mentioned in the column. Anyone who acts in reliance on the column is exclusively responsible for any damage or loss they may incur.

Published by Globes [online], Israel business news - www.globes-online.com - on March 31, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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