FSI International, Inc. (FSII $3.87) designs, manufacturers, markets, and supports equipment used in the fabrication of microelectronics, such as advanced semiconductor devices. It provides surface conditioning technology solutions and microlithography systems, and support services to the manufacturers of integrated circuits. While the near term outlook for semiconductor equipment spending is negative, FSII has two specialty products that are well positioned to gain significant traction in the market and drive revenue and profit growth over the next few years. Both the ORION and ANTARES systems have been in production for the past four years or so, but each is poised to finally see a meaningful ramp in revenue and profit contribution as the large foundries, and logic and memory integrated circuit manufacturers make additional purchases. In the most recent fiscal year (August, 2011), sales of these two systems accounted for roughly $56 million of the company’s $97 million in total sales. Samsung Electronics accounted for 27% of the total sales in the most recent fiscal year, which clearly represents a risk given this customer concentration. It also illustrates the opportunity the company has to sell to the other major customers in the industry, several of whom have purchased a small number of systems to date.
While FSII’s management only provides a financial forecast for the next quarter given the lengthy sales cycle of these products, the optimistic goal is that system sales of these two products could be as high as $120 million, perhaps in the current fiscal year. Spare parts, service revenue, and sales of other systems could contribute another $50 million in revenue, bringing total revenue to $170 million with estimated earnings per share approaching $1.00. This compares to current consensus estimates of $118 million in revenue and EPS of $0.24 for the year ending August, 2012. FSII has strengthened its balance sheet considerably and reduced its fixed operating costs. With a current tangible book value of $2.33 and no debt, I continue to find the shares to be attractive given the expected order and sales momentum in the coming quarters. The stock has moved considerably in the past three months, and FSII is a very small company with an equity value of only $150 million.
Given the volatile nature of the semiconductor equipment industry and unattractive long term returns on invested capital, I view FSII as a trading opportunity in 2012 and not a long term hold. However, with the stock’s inexpensive valuation and my expectation of a strong flow of orders and sales, I think the stock could appreciate an additional 50% this year to around $5.80. FSII’s small size is clearly a significant risk, both with regards to competing against other semiconductor equipment suppliers and with regards to quarterly results. I first bought FSII in June, 2011 and continue to hold the shares.
