CAMT - Camtek: Hidden Gem In Semiconductor Land

2023-09-19 16:32:50 ET

Summary

• Camtek Ltd. is a niche player in the semiconductor sector with reasonable valuations and strong growth potential.
• The company posted solid financial results, with $321 million in revenues and substantial profits in 2022.
• Camtek recently announced a $100 million deal to acquire FormFactor's FRT Metrology business, further expanding its market presence.

Shares of Camtek Ltd. (CAMT) have shown some real signs of life as of recent, as the business announced a bolt-on deal as well. As I have never covered the shares before, and shares of Camtek have seen a strong performance in recent times, it is time to establish an investment thesis on the business.

What I see is a very interesting niche player in the semiconductor sector, one which traded at very reasonable valuations at the start of the year. With shares having doubled over the past quarter, multiples have expanded, but they are still not that demanding. Seeing the potential in the business, I am willing to buy the dip here, although I am mindful of the recent share price momentum.

The Business

Camtek is a developer and manufacturer of high-end inspection and metrology equipment which is used in the semiconductor industry. These systems inspect and measure wafers during various stages of the production process. These inspection services are used in demanding semiconductor sectors, serving leading global players including big foundries.

The Israel-based business generated $321 million in revenues in 2022, up 19% on the year before, which marked solid growth in a tougher semiconductor environment. The company posted very substantial GAAP profits, with operating profits of $81 million and change translating into margins of 25%. Net earnings came in at nearly the same number at $80 million due to interest income received on a substantial net cash balance and a modest tax rate, with diluted earnings reported at $1.66 per share based on a diluted share count of 48 million shares.

Shares of the company traded at just $24 by year-end 2024, as the company only commanded a $1.15 billion equity valuation at those levels. Based on a net cash position of nearly half a billion, assuming the debt would be converted, operating assets were valued at just $700 million.

This is a very modest valuation in relation to the net earnings reported, for a less than 10 times earnings multiple, while solid growth was seen. Even at a low valuation of $24, shares had come a long way as this was a mere $2 stock in 2016 which rose to a peak in the forties in 2021. Nonetheless, the valuation looked dirt cheap.

2023 - On Fire Again

Since the start of the year, shares of Camtek have traded in the $20s and in fact it took until June until the $30 barrier was reached. Ever since, momentum was very strong as shares rose to the low sixties in recent weeks, now trading near that level at $57 per share.

First quarter results, as released in May, provided few reasons to be cheerful. Revenues fell some 6% year-over-year to $72 million as earnings fell by similar percentages. This did not come completely unexpected as the sector at large was deferring capital spending, with fourth quarter revenue growth in 2022 already having slowed down to 11%.

Positive news arrived in July as the company announced orders for 42 systems for heterogeneous integration, HBM and fanout applications. These were set to be shipped in the second half of the year, and while the revenue contribution has not been quantified, it likely is very significant. Applications of these machines include AI, gaming and datacenters, all the hot segments of the semiconductor market here.

Later that month the company announced a 7% fall in second quarter sales to $74 million, with earnings again holding up quite nicely, all while net cash holdings surpassed the half a billion mark. Later in August, the company announced another 45 orders in August, with orders surpassing 100 systems year to date.

These orders are set to drive growth with third quarter sales seen between $77 and $79 million, with growth seen in the fourth quarter and 2024. In fact, the company believes that it could go a long way in becoming a $500 million business in 2024.

With 48 million shares now trading at $57, the market value has risen to $2.74 billion, or just over $2.2 billion if we factor in net cash holdings post the second quarter.

A Deal

In September, Camtek took advantage of its operating momentum and cash holdings to announce a $100 million deal to acquire FormFactor's FRT Metrology business. The German company supplies high-precision metrology solutions for Advanced Packaging and Silicon Carbide markets.

With an $30 million revenue contribution in 2024 and accretion seen in 2024, the sales multiple comes in around 3.3 times. Camtek itself trades around 9 times sales here, but they are very profitable sales, and this comes after a big run higher in recent times.

A Final Word

With the orders on average taking place at order prices around a million per system and the business believing in a half a billion dollars revenue number in 2024, that suggests net earning potential of around $125 million, equal to $2.50 per share. That excludes the contribution of the FRT business, as the remaining $400 million net cash position comes to around $8 per share as well.

This means that the unleveraged business trades at 20 times multiple, quite a reasonable multiple given the momentum, although there is a highly cyclical component to this, after shares have seen huge momentum as of recent.

Given the interesting role which the company plays in the industry, potential M&A interest might not be ruled out as well, as the valuation looks defendable given the operating momentum. On the other hand, I am mindful of the huge momentum after shares have doubled over the past quarter. Hence, this company definitely deserves a promising place on my watch list, as I am hoping for significant dips to potentially get involved with Camtek Ltd. shares here.

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