2023-11-17 07:33:25 ET
Summary
- Nova Ltd.'s Q3 '23 revenue reported a 11% YoY decrease, while net income fell 4% and EPS dropped from $1.22 to $1.17 but the company beat estimates and management guidance.
- Investor confidence in Israel-based stocks on American exchanges has been affected by recent bad news from the Middle East but the share prices are rising again.
- Despite the negative outlook, Nova stock is seen as a potential buy opportunity with the potential to scale up by 10%.
Bad News
Analysts had forecast limp third-quarter revenue and earnings for Israel-based Nova Ltd. (NVMI) which sells into the semiconductor industry. Its Q3 '23 revenue and earnings report released last week was mixed. Nova's Q3 '23 revenue was reported -11% Y/Y. Net income fell 4%. Its EPS dropped from $1.22 in Q3 '22 to $1.17.
Inter alia,
- Bad news from the Middle East deflated investor confidence in October in Israel-based stocks publicly traded on an American stock exchange.
- The S&P ratings agency recently downgraded Israel's credit outlook "with the scenario of the war escalating… S&P sees GDP growth of 1.5% in Israel in 2023 and 0.5% in 2024. The company's annual forecasts represent a sharp contraction of 5% in GDP in the fourth quarter of 2023."
- Israel's fiscal deficit is probably going to hit 5.3% of GDP in FY '23 and 2024, up from the Bank of Israel's previous forecast before the war of 2.3%.
- A Semiconductor Industry Assn. industry report confirmed semiconductor sales are slumping .
Management outlook to the horizon is beamish:
"As we already look ahead toward 2024, we expect Nova to resume its growth and outperformance trajectory towards our $1B strategic plan. 2023 Fourth Quarter Financial Outlook Management provided an outlook for the fourth quarter, the period ending December 31, 2023. Based on current estimates, management expects (Q4 '23) $123 million to $132 million in revenue. $0.96 to $1.11 in diluted GAAP EPS, (and) $1.16 to $1.31 in diluted non-GAAP EPS.
The consensus EPS forecasts were beaten before, so we think management will be on the spot again. For instance, FY '23 EPS can top $4.02 and +$5.15 in '24
Fiscal Quarter End | Date Reported | Earnings Per Share* | Consensus EPS* Forecast | % Surprise |
---|---|---|---|---|
Sep 2023 | 11/09/2023 | 1.11 | 0.96 | 15.63 |
Jun 2023 | 08/03/2023 | 0.97 | 0.83 | 16.87 |
Mar 2023 | 05/11/2023 | 1.12 | 0.91 | 23.08 |
Dec 2022 | 02/15/2023 | 1.17 | 1.12 | 4.46 |
These low expectations reflect the Byung-Chul Han philosophy characterizing capitalism as a technologically driven state of negativity and depression which seems to dominate economic thinking today. Yet despite this perniciousness, we believe Nova stock is a potential Buy opportunity. Shares, in our opinion, have momentum, and if the company again beats EPS estimates and reports profits the share price can potentially scale up another 10% around to its pre-war 52-week high of $131.51.
Nova Factor Grades (Seeking Alpha)
Nova Ltd., formerly Nova Measuring Instruments Ltd., operates in a complex environment that Amit Peretz best explains in a recent Seeking Alpha article . Nova is a tech software company designing and selling process control systems used in the manufacture of semiconductors. Customers are primarily based in Israel, Taiwan, the United States, China, and Korea, but it sells worldwide. The product portfolio includes systems for materials and chemical metrology measurements, for process control for various semiconductor manufacturing process steps, and sectors of the integrated circuit manufacturing industry, including logic, foundries, memory manufacturers and process equipment manufacturers.
Good News for Tech
Nova Ltd and its subsidiaries, ancosys GmbH , Nova Measuring Instruments Inc , ReVera Incorporated , HyperNex, Inc. , is, by market cap ($3.36B), the 13th largest Israel-based publicly traded business on an American stock exchange and fourth in market capitalization among peers. Our other articles on Seeking Alpha about Israel-based publicly-traded are also maintaining their standings or flourishing even under the stress of war.
The share price hit $127 in the first week of September and tumbled to $90 per share in lockstep with Israel-based public companies after the October 7 massacre by Hamas and Israel's declaration of war. Three days later, the share price recovered to $100 and popped about another 13% after the earnings report release beat all expectations. Shares climbed 2.27% on Nov 15.
Israel-based Stocks Publicly Traded (Goldmeier LLC)
The only risks we foresee for investors in Nova extend from a long war and heightening tensions between America and China in the semiconductor industry. But Nova is a global operator and management does not anticipate any impact on performance "and no disruption to our delivery schedule." Holding shares for a long time might not be as fruitful for retail value investors if the share price stagnates because there is no dividend.
The SA Quant Rating has been stuck on a Hold value all year while Wall Street analysts maintain a Strong Buy consensus. Nova's PE ratio is average at around 25 compared to peers but higher than the sector median of 19.52. The valuation falls short on issues like PEG GAAP, EV/Sales, P/Sales, and P/Book.
Good News
Q3 '23 performance exceeded revenue and profit guidance management shared earlier in the year because of concerns about slow growth in the semiconductor business. Briefly, the profit margin increased from 24% to 26%; some increase came from belt-tightening of expenses and adding new customers. ROE touched 23% for the trailing 12 months.
Asset growth was 16.10% while ROA is +13%. Despite a low S A grade for growth , revenue is growing nearly 8% Y/Y and forward is expected to be about 11.4%. EBITDA, EBIT, Operating cash flow growth, and EPS metrics all look healthy if not outstanding. CAPEX growth gets an A grade because "over the past five years… Nova deployed 180% more capital into its operations."
Here is a snapshot of Q3 financial highlights from the company's Form 6-K:
• Quarterly revenue was $128.8M (+5%) Q/Q exceeding company guidance but a decrease of 10% compared with Q3 '22.
• GAAP net income of $33.7M translates to $1.05 per diluted share, +12% Q/Q exceeding company guidance.
- Gross margin in Q3 '23 was 56% vs 57% Q/Q and 56% in Q3 '22.
- Operating expenses in Q3 '23 were $38.1M compared with $41.9M Y/Y.
- Cash and cash equivalents in Q3 '23 hit $116,480M vs $111,121M Dec '22.
- Total current assets increased to $724,846M from $612,946M last Dec.
- Shareholders' equity is up to $700,780M from $586,963 last Dec.
We think the momentum underpinning the share price comes from better-than-expected financials. A Seeking Alpha headline highlighted Nova's GAAP EPS that beat forecasts by $0.14 and revenue beat by $5.17M. The theme of beating expectations in Q3 carries through the media. We were not surprised since actual EPS beat expectations in 9 of the last 9 quarters. For example, the consensus was for Q2 '23 EPS of $1.0 when the actual was reported at $1.06.The previous quarter was forecast to be $1.04 but was $1.23. Company revenue is likely to grow faster than its earnings rate.
Nova Revenue & Earnings (Seeking Alpha)
Takeaway
Overall, we believe Nova Ltd. is a potential opportunity for investors, even retail value investors though there is no dividend. Infrontanalytics.com captures the company's essence in this image:
Nova Company Picture (Infrontanalytics.com)
In November 2021, Nova Ltd. announced a cash $100M purchase of a German company expanding Nova's position in the backend semiconductor industry and completed it in 2022. Management sticks tightly to its core business. Nova Ltd. still holds almost $200M in debt but has over $662M in equity and more cash than its debt. Plus, it sports a sizeable market cap.
We expect its free cash flow to increase by +$100M and the Enterprise Value to hit $2.5B. This will support continuing momentum that is, in our opinion, going to support an increase in the share price close to or above the 52-week high over the next 12 months.
The semiconductor industry undergirds all aspects of global economic growth and the stagnation will eventually end. Nova's global operations will let it operate with few interruptions since it will be able to shift to overseas tech workers while Israel's tech employees are on active military duty.
We don't consider Nova stock undervalued after its recent recovery but we suspect the price will be moving further up, so investors ought to heed Dr. Suess: "Today is your day!... And you know what you know. And YOU are the guy who'll decide where to go… Your mountain is waiting. So… get on your way!"
For further details see:
Nova Ltd. Shares Keep On Rising