The Chips Stock You Aren't Considering -- But Should Be

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Brooks Automation (Nasdaq: BRKS  ) . Is this supplier of communications equipment the real thing? Let's get right to the numbers.

Foolish facts

Metric

Brooks Automation

CAPS stars (out of 5) ****
Total ratings 156
Percent bulls 88.5%
Percent bears 11.5%
Bullish pitches 12 out of 14
Highest rated peers FEI Company, FormFactor, DAQQ New Energy Corp. American

Data current as of Jan. 26.

Brooks Automation scores well with Fools, as much because of its industry as anything else. The digital world we're living in embraces gadgets in ever-greater numbers, and more devices means more chips, which means more work for chip manufacturers and the companies that service them. Companies like Brooks Automation.

Research speaks to the size of the opportunity. IDC projects $303 billion in worldwide semiconductor revenue in 2011, up 9% over last year. The firm also expects 6% compound annual growth in the sector from 2010-2015. Manufacturers such as Brooks Automation customers' Applied Materials (Nasdaq: AMAT  ) should remain plenty busy.

The elements of growth

Metric

FY 2010

FY 2009

FY 2008

Normalized net income growth Not measurable Not measurable Not measurable
Revenue growth 171.1% (58.4%) (29.2%)
Gross margin 28.0% 6.8% 24.1%
Receivables growth 140.1% (42.5%) (36.9%)
Shares outstanding 64.1 million 63.3 million 62.6 million

Source: Capital IQ, a division of Standard & Poor's.

And yet looking at the numbers, I can see why the bears remain skeptical. Growth had gone missing till recently. Let's review:

  • Revenue growth is suddenly back after two years on the lam. The trouble is that growth has yet to translate into profits. The good news? Cash is flowing. Brooks has produced more than $24 million in free cash flow over the past year.
  • And the growth appears legitimate. Receivables also rose in the triple digits, but at less than revenue. Management seems to have been prepared for the outsized demand Brooks is seeing lately.
  • Rising gross margins also speak well for the company. There's either pricing power or operating leverage built into the model. Or perhaps both. Either way, it's a good sign for growth seekers.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 yrs.)

Benchmark Electronics (NYSE: BHE  ) (7.9%)
Brooks Automation (3.3%)
Flextronics International (Nasdaq: FLEX  ) (6.0%)
Jabil Circuit (NYSE: JBL  ) 22.0%
MKS Instruments (Nasdaq: MKSI  ) 7.8%
Sanmina-SCI (Nasdaq: SANM  ) Not measurable

Source: Capital IQ, a division of Standard & Poor's. Data current as of Jan. 26.

Brooks doesn't fare as well in this table, but that's not at all surprising. The company's growth spurt is a recent occurrence. Most of Brooks Automation's peers seem to be in a similar position. Only Jabil Circuit has a history of (mostly) consistent growth. That, and recent gains in returns on capital make Jabil the class of this group.

Grade: Unsustainable
But don't count out Brooks Automation completely. While it's impossible to call the company a sustainable grower given its record, there's a lot to like about its valuation. The stock trades for a fraction of the 18% growth analysts expect over the next five years, resulting in a bargain basement PEG ratio of 0.58.

To be fair, because the PEG depends on projected growth and projections are frequently off, it's possible that analysts are waxing bullish at exactly the wrong moment. Still, I like the opportunity and have rated the stock to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Brooks Automation at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on the stocks mentioned in this story? Add Benchmark Electronics, Brooks Automation, Flextronics International, Jabil Circuit, MKS Instruments or Sanmina-SCI Corp. to your watchlist.

FEI is a Motley Fool Rule Breakers recommendation. FormFactor is a Motley Fool Hidden Gems pick. Motley Fool Options has recommended subscribers open a bull call spread position in FormFactor. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of FormFactor and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


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