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
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
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 |
(7.9%) |
| Brooks Automation | (3.3%) |
|
Flextronics International |
(6.0%) |
|
Jabil Circuit |
22.0% |
|
MKS Instruments |
7.8% |
|
Sanmina-SCI |
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.
