CAMT - Camtek Might Be Getting Ready For A Breakthrough

2023-05-30 03:42:24 ET

Summary

• The stock has been on hold for months, but there is reason to suspect a breakout could be coming in the near future.
• Sales and earnings declined in Q1, but the outlook believes the worst has passed, and a full rebound could be due in 2024.
• Valuations for CAMT are fair, especially considering its outperformance, and they are actually below where they have been on average.
• Long CAMT makes for a compelling option, which some may or may not agree with, depending on one’s viewpoint.

Camtek ( CAMT ), a supplier of metrology, inspection equipment and related software for the semiconductor industry, has been stuck in a holding pattern for much of 2023 after a strong start to the year. However, there is reason to think the stock is priming itself for a move higher in the not too distant future. Why will be covered next.

The stock has been stuck in a holding pattern for months

CAMT ended 2022 near the lows for the year, but 2023 has turned out better thus far. The stock has gained 28% YTD. This gain is comparable to that of the sector as a whole. The iShares Semiconductor ETF ( SOXX ), for instance, has gained 32% YTD. On the other hand, it’s worth noting that the gains came in the early part of the year with not much to show for after early February. The chart below shows how the stock has stalled in recent months.

There are several things worth noting in the chart. First, the stock has struggled to get past what seems like resistance in the $27.50-29.50 region. The stock managed to get to this region as early as February 2 at $28.85, but the stock has yet to succeed in getting past the $27.50-29.50 region despite numerous attempts and even though almost four months have passed. The latest attempt occurred on May 25 with the stock getting as far as $28.82 before pulling back.

It’s also worth mentioning that the $27.50-29.50 region contains a Fibonacci level. If starting from the March 2020 low of $6.27 to the November 2021 high of $49.60, then the 50% Fibonacci retracement level of this uptrend is $27.94. Fibonacci levels are potential support or resistance areas, which could explain why the stock seems to have a tendency to change directions in the $27.50-29.50 region.

Still, while the stock has been unable to break through resistance for months, there is reason for some optimism it may eventually succeed. For instance, the trend seems to be leaning towards higher prices with a sequence of higher lows in 2023, which can be connected to create an ascending trendline. Note how the stock did not fall below this trendline in April and May even though there were plenty of opportunities to do so. Support is moving higher, which suggests buyers are getting the upper hand on sellers.

In contrast, resistance has not moved, which means support and resistance are on course to collide once their trendlines intersect. The stock will thus have to break through resistance or fall below support. While the latter is possible, the odds are in favor of a break through resistance if the charts patterns are any indication with the buyers in the driver seat. Nevertheless, a breakout could take a while since the trendlines are yet to come close to converging and there is room for some sideways movement. The stock could thus continue its recent holding pattern for a while longer.

Possible catalysts that could break the stalemate

Support has been creeping up this year, but resistance has also held its ground. If this stalemate is to be broken and the stock is to break out, whether to the upside or to the downside, a catalyst may be needed. This could come in the form of a change in the industry outlook. At this moment, CAMT is dealing with an industry downturn that led to declining sales and profits in its most recent report.

The table below shows the numbers for the Q1 FY2023 report. Revenue declined by 11.8% QoQ and 6.1% YoY to $72.4M. GAAP EPS declined by 7.7% YoY to $0.36 and non-GAAP EPS declined by 4.6% YoY to $0.42. As a result, cash, cash equivalents and short-term deposits increased to $492.7M at the end of Q1 FY2023. Note how gross margin continued its recent decline, an unwelcome development.

Source: CAMT

However, while the top and the bottom line have fallen off, the outlook does not expect this to continue. Guidance calls for Q2 revenue to be similar to Q1, which implies revenue of around $72-73M. From the Q1 earnings call:

“Regarding the second quarter, we estimate the sales to be similar to Q1 '23, which represents a decline of 9% year-over-year. As we have stated in our previous call, we continue to believe that our leading position in specific segments, broad and diversified customer base and long-term strategic relationships with customers will enable us to outperform the industry.”

A transcript of the Q1 FY2023 earnings call can be found here .

Furthermore, the outlook from CAMT is cautiously optimistic about the second half of FY2023.

“Regarding the second half of '23. Based on our discussions with customers, there is a potential for a moderate improvement in the business situation of our customers. At this stage, and considering the lead times which are becoming shorter, it is hard to foresee when this potential translate into orders. At times like this, when the world is experiencing an economic slowdown, we conduct our business with utmost care.”

At the same time, it’s too early to say for sure whether the second half will indeed be better.

“So just in general, we still don't have a clear view on the second half. On one hand, we do hear some positive feedback from customers, but we are not taking it to the bank yet, and we don't have all the orders in hand to support growth. So at this point, we provided guidance for the second quarter. We gave some indication for the second half. It's too early to say whether the second half is going to be stronger.”

Consensus estimates are similarly cautious. Consensus estimates expect a repeat of Q1 in Q2 with non-GAAP EPS of $0.42 on revenue of $72.3M. This is expected to continue through the second half with estimates predicting CAMT will end up with non-GAAP EPS of $1.68 on revenue of $292M by the end of FY2023.

While these numbers represent YoY declines of 10.6% and 9.0% respectively, the top and the bottom line are expected to stay pretty much flat QoQ in FY2023 with no further decline like the one seen in Q1. In addition, the numbers are expected to improve the following year. Estimates predict non-GAAP EPS of $1.86 on revenue of $323.5M in FY2024, which would put CAMT close to where it was in FY2022 after a down year in FY2023. CAMT earned $1.88 on revenue of $320.9M in FY2022.

These projections are backed by industry forecasts. For instance, a forecast from SEMI predicts fab equipment spending will rebound by 21% YoY to $92B in 2024, one year after decreasing by 22% YoY to $76B in 2023. The size of the market in 2024 would still be below the record highs seen in 2022, but the market would be similar to the one in 2021. Any further upgrades to these projections could help CAMT, but any downgrades will hurt CAMT.

CAMT trades at a discount

It’s also worth mentioning that CAMT is cheaper than it has been on average in recent years in terms of multiples. For instance, CAMT trades at 19.4 times forward GAAP earnings with a trailing P/E of 17.1. In comparison, the 5-year averages are 21.5x and 27.3x respectively. Keep in mind that CAMT has outperformed, even during the current downturn in the industry, with sales and earnings holding up better than most. For some this might be enough to sway those on the fence that the time is right for long CAMT, which could give the stock the boost it needs to push it through resistance.

Source: Seeking Alpha

Investor takeaways

There are a number of arguments to be made as to why it may be time to be long CAMT. CAMT has seen its top and bottom line shrink in the most recent report, but the outlook suggests the worst has passed. The numbers are not expected to get any worse with Q2 guidance calling for Q2 to stay level with Q1.

The industry is forecast to contract in 2023, but CAMT is expected to outperform by declining to a lesser degree. Furthermore, the industry is expected to stage a strong rebound in 2024, which bodes well for CAMT. Forward projections expect CAMT to challenge the 2022 record highs in 2024. Getting in at current levels could pay off next year when earnings are expected to rise again, especially since multiples are for the most part lower than they have been on average in recent years.

While charts are not infallible, they do lean towards higher stock prices for CAMT. True, the stock has been unable to get past resistance for months, but the stock seems to be getting closer and closer to doing just that. Support is rising with the buyers having the upper hand on the sellers, a situation that puts the odds in favor of a breakthrough resistance.

However, there is reason to be cautious, nonetheless. While the forward projections are positive for CAMT, it's possible they may be overly so. The earnings estimates are based on the assumption of an industry revival, but there is no clear evidence business is indeed getting better for CAMT, something that CAMT itself acknowledges. At the moment, CAMT is not seeing further dips in sales and earnings, but it is also not growing.

Keep in mind that CAMT relies on China to a large extent, which may give some people pause. While CAMT has been spared the fallout of trade restrictions between the U.S. and China, unlike other companies in the industry, it’s always possible something might change on this front that could impact CAMT in a negative way.

It might be a mistake not to be long CAMT, but I am neutral on CAMT as stated in a previous article . The odds may favor the stock going higher, but that does not make long CAMT a sure bet. There is a fair amount of uncertainty associated with the outlook and changes to the outlook are not impossible. If the revisions happen to be downwards, CAMT might just resume the downtrend it was stuck in until late last year.

Bottom line, the most likely path forward for CAMT is for the stock to break through resistance on the way higher, which implies long CAMT is the way to go. Nevertheless, long CAMT is not without risk since the outlook is rather hazy, all the bullish industry forecasts notwithstanding. If someone can deal with the latter, then long CAMT is probably the way to go. If not and there are some doubts about CAMT, especially as it relates to the outlook, then it may be wise to stick with what the stock itself has done, which is to stay on hold for now.

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