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Growth & Income

MTS Systems Corporation (MTSC - Snapshot Report) recently delivered a big 42% positive earnings surprise for its fiscal 2011 fourth quarter and also posted a record backlog of orders. As a result, consensus estimates soared for 2012, sending the stock to a Zacks #1 Rank (Strong Buy).

The company also has a solid balance sheet and recently raised its dividend by 25%. It currently yields 2.5%. Valuation is attractive too, with shares trading at just 11x forward earnings, below both the industry average and its historical median.

Company Description

MTS Systems Corporation operates two separate businesses: the Sensors division and the Test division.

Test systems (78% of total revenue) enable users to measure the performance, durability, and safety of products like building materials, automobiles, and aerospace products prior to production. The Sensors business (22%) produces sensitive measuring equipment to monitor the position of machinery and liquid levels during production operations.

The company is headquartered in Eden Prairie, Minnesota and has a market cap of $1.6 billion.

Fourth Quarter Results

MTS Systems delivered record revenue and earnings per share for the fourth quarter of its fiscal 2011. Earnings per share came in at 94 cents, crushing the Zacks Consensus Estimate of 66 cents. It was a whopping 74% increase over the same quarter in 2010.

Revenue surged 24% to $131.6 million, well ahead of the Zacks Consensus Estimate of $106.0 million. Both divisions reported strong top-line growth in the quarter, with 25% growth in Test and 23% growth in Sensors. Orders increased 3%.

The gross margin expanded 70 basis points to 43.0% of revenue, as the company leveraged its fixed expenses. Meanwhile, operating income surged 59% year-over-year.

Outlook

MTS Systems posted a record backlog of $540 million at the end of Q4, and management expects fiscal 2012 revenue and EPS growth rates in the low double digit range, assuming steady economic conditions.

These factors led analysts to revise their estimates significantly higher, sending the stock to a Zacks #1 Rank (Strong Buy) stock. As you can see in the company's Price & Consensus chart, MTS Systems had a nice 'beat and raise' in the fourth quarter:

MTSC: MTS Systems Corporation

Based on consensus estimates, analysts expect 12% EPS growth in 2012 and 5% growth in 2013.

Dividend

MTS Systems has a very solid balance sheet, with a healthy cash position and no long-term debt. This has allowed it to steadily raise its dividend over the last several years:

MTSC: MTS Systems Corporation

In fact, earlier this year the company increased its dividend by 25%. It currently yields 2.5% yield.

Valuation

The valuation picture looks attractive too. Shares trade at just 11.0x 12-month forward earnings, a discount to the industry median of 12.6x, and its historical median of 17.4x.

Its price to book ratio of 3.0 is also below the industry multiple of 3.8.

The Bottom Line

With earnings estimates rising, strong growth forecasted, a solid 2.5% dividend yield and very reasonable valuation, MTSC offers a lot of total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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