It's sometimes annoying that the market doesn't let a good idea stay "your little secret" for too long. Legitimate quality gets noticed sooner or later, and if you wait too long to get aboard, the train will leave the station without you.
For instance, look at Rofin-SinarTechnologies (NASDAQ:RSTI), a small manufacturer of lasers. Sure, the stock has been plenty volatile, and earnings haven't always been a picture-perfect upward march of growth, but we at The Motley Fool have pegged this one as a quality company for some time. In fact, John Reeves identified this one to Motley Fool Hidden Gems subscribers way back in October of 2004.
Judging by the company's update today, I'd say business is still no worse than "all right." Revenue was up an admittedly modest 4%, but impressive margin improvement transformed that 4% revenue growth into 45% reported operating income growth. Only solid operating leverage can spin straw to gold like that.
While I was a little disappointed to see that orders in the quarter lagged revenue, that's not entirely uncommon, and I don't regard it as a major negative. Looking at the sales breakdown, I'm not too surprised to see macro application sales down 7% -- it hasn't been the greatest of times for certain clients like automakers. But the 18% growth in micro was a nice counterbalance. Given the future opportunities in marking/etching, it wouldn't surprise me to see the micro side of the business continue to outpace the macro.
As was the case with II-VI (NASDAQ:IIVI), I think investors can hope that a recovery in semiconductor equipment spending will translate into increased sales. What's more, global manufacturing activity still seems pretty positive, and it's hard to imagine the U.S. auto business getting much weaker. (Famous last words, I know.)
The fly in the ointment here might be valuation. You have to make some healthy guesses for future cash flow growth to reach attractive targets based upon discounted cash flow analysis. Then again, the company is growing, even as it produces a double-digit return on invested capital. That might not be reason enough to buy in, but it seems like a pretty good reason to hold on and see what happens.
Further focused Foolishness:
Let Motley Fool Hidden Gems help you shine a light on more dazzling small-cap stocks with white-hot growth potential. For access to all of Tom Gardner's archived picks and a peek at his two newest discoveries, sign up today for a 30-day free trial.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
