The potential superstock of the week is Xcerra Corporation (XCRA). XCRA is a provider of test and handling capital equipment, interface prod...

Weekly Superstock Scan 12 Mar 2018 - 16 Mar 2018: Xcerra Corporation (XCRA)

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The potential superstock of the week is Xcerra Corporation (XCRA). XCRA is a provider of test and handling capital equipment, interface products, test fixtures and related services to the semiconductor and electronics manufacturing industries. Xcerra operates in the semiconductor and electronics manufacturing test markets and is the parent company to the atg-Luther & Maelzer, Everett Charles Technologies, LTX-Credence and Multitest businesses. Semiconductor designers and manufacturers worldwide use XCRA's test and handling equipment and interface products to test their devices during the manufacturing process.






XCRA operates in two reportable segments
  • Semiconductor Test Solutions (STS): Includes operations related to the design, manufacture and sale of automated test equipment for the semiconductor industry that is used to test system-on-a-chip, digital, analog and mixed signal integrated circuits.
  • Semicondutor Handlers: Includes operations related to the design, manufacture and sale of test handlers used.

Technical



XCRA has one of the best long flat base that I have seen for some time. Since April 2017, XCRA has been trading in a very tight range from $9.05 to $10.23. Last week, price broke strongly above the base to hit $10.93 before closing at $10.67. 

The volume of the week was 10.6 million shares, almost 4 times its average weekly trading volume. There was no news last week, but the volume started to pick up two weeks ago. Then XCRA reported outstanding quarterly results along with a 'negative news' of a failed merger. After two weeks of tug-of-war, it appears that the bull has taken control.


Fundamental



Including the most recent quarter, XCRA recorded 6 consecutive quarters of year-on-year EPS growth. 

The current quarter was an especially good quarters, as XCRA reported $0.14 EPS compared to $0.05 a year ago. The company highlighted that Q2 is a seasonally weak period and the current Q2 EPS was XCRA's highest for any fiscal Q2.


Failed Acquisition by Hubei Xinyan

XCRA announced last year that Hubei Xinyan Equity Investment Partnership had agreed to buy the company’s all outstanding shares for US$10.25 per share in cash, which valued it about US$580 million.

Two weeks ago, XCRA announced that it will terminate its sale, citing difficulty in getting U.S, approval for the deal. 

While the deal was beneficial as it will allow Xcerra to accelerate its growth in the China market as well as broadening and strengthening their customer relationships around the world, the failed deal was not all negative.

After the acquisition was announced, shares have traded around the acquisition price while revenues and earnings have grown strongly, suggesting that the company may be undervalued at the acquisition price. Moreover, Xcerra can still reap the benefits without being acquired as XCRA and Xinyan are discussing alternatives to pursue opportunities in new and existing markets in China.

Increasing Market Share Through New Products

XCRA saw share gains in 2017 for all STS products, specifically, XCRA gained two points of share on SoC tests, two points in handling and contactor revenues are now at record levels. 

One of the main reason is the rollout and instrumentation that they put on Diamondx and growth into specific regions including Japan. XCRA also launched multiple new sensor applications for InMEMS solution that brought in more customers coming into volume.

For the electronic manufacturing segment, growth has out-paced the market too except for the fixture service business.

XCRA is expected to gain share through a product introduction in 2018. XCRA has pointed out that the MEMS space may be a potential catalyst in late 2018 (2019 fiscal year) driving the handling upside.

Matrices
o Float of 50.2 million shares with a average daily trading volume of 1.2 million shares. The float is thus almost 40 times its average trading volume.
+ XCRA is trading at 11.4 times its trailing twelve months EPS.


Risk Factors/ Things I do not like:


  • Multi-year Resistance level: The $11 level served as a multi-year resistance level for years. XCRA's share price bounced off the resistance level in 2010 and several times in 2014 and 2015 but failed to break above. It may be tough for XCRA to break above $11 once again.




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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.