A Diamond in the Rough

Rofin-Sinar Technology's (Nasdaq: RSTI  ) first quarter produced a 64% increase in net income over the comparable quarter a year ago. The industrial-laser maker's second quarter (ending March) saw sales climb a robust 26%, and net income soared a spectacular 55%. So why is the stock down approximately 5% since its earnings release -- and why does it trade for a paltry 12 times trailing earnings?

We might blame this stock's recent decline on honest management. Their near-term outlook sees trouble for machine tools in Europe, autos in North America, and continuing weakness in the semiconductor-marking business.

Is there cause for concern that this Motley Fool Hidden Gems recommendation is heading for an earnings shortfall?

Let's start with the analysts. They see the company earning $2.35 this fiscal year (which ends in September) and $2.92 a share (a 24.3% increase) in 2006. That's great news.

Then look at the balance sheet. Wow, $108.7 million in greenbacks and $48.5 million in total debt. This is a small, cash-rich company.

So, why does this stock sell for such a low multiple to earnings?

It's not due to a building debt load. While cash increased by $8.4 million over the comparable year-ago quarter, debt fell $6.3 million. These are both positive trends.

The company doesn't have the Hidden Gems trait of being undiscovered. Five analysts provided an earnings estimate for 2006, and 74.7% of the stock is owned by institutions. The share base is small, at 15.1 million shares, but that doesn't explain the low earnings multiple. Heck, competitors Coherent (Nasdaq: COHR  ) and Excel Technology (Nasdaq: XLTC  ) sell for more than 20 times trailing earnings.

The simple reason for the stock's recent swoon (although it is still up 32.6% over the last 52 weeks) may be the January stroke of its chairman and CEO. Peter Wirth had led the company since its IPO spinoff from Siemens (NYSE: SI  ) in November 1996. Uncertainty over the company's direction and leadership may have been the sole reason for the stock's inability to command an industry-level multiple.

The company announced separately that interim CEO and Chairman Gunther Braun (previously the CFO for nine years) would take control of the company -- although Mr. Wirth will continue to contribute. Maybe, with the leadership issues out of the way, the stock can climb in market valuation. Based on fundamentals, it looks very cheap.

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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see the Motley Fool's disclosure policy.