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Growth & Income

MTS Systems Corporation (MTSC - Snapshot Report) carried its momentum into the first quarter of its fiscal 2012 and delivered another solid beat on both earnings and revenue. This prompted analysts to raise their estimates yet again, sending the stock to a Zacks #1 Rank (Strong Buy) stock.

Despite the recent run up in shares, valuation still looks reasonable at just 13x forward earnings.

Company Description

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

Test systems (81% 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 (19%) 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 $819 million.

First Quarter Results

MTS Systems reported its first quarter 2012 results on February 2. Earnings per share came in at 98 cents, beating the Zacks Consensus Estimate of 83 cents. It was a 14% increase over the same quarter in 2011.

Revenue surged 26% to $133.7 million, beating the Zacks Consensus Estimate of $124.0 million. This was driven by 32% growth in Test systems.

Operating income was up 27% year-over-year, driven by a higher gross margin and fixed expense leverage.

Estimates Rising

Analysts revised their estimates higher yet again off the strong quarter, sending the stock to a Zacks #1 Rank (Strong Buy).

Take a look and the stair-step movement in consensus estimates over the last several months:

MTSC: MTS Systems Corporation

The Zacks Consensus Estimate for 2012 is now $3.81, representing 17% growth over 2011 EPS. The 2013 consensus estimate is currently $4.11, corresponding with 8% growth.

Valuation Still Reasonable

Although shares of MTSC have risen 28% since I last wrote about it on December 28, valuation still looks reasonable.

Shares trade at 13x 12-month forward earnings, a discount to the industry median of 15x and its historical median of 17x.

Its price to book ratio of 3.6 is also below the peer group multiple of 5.3.

The company also pays a dividend that yields a solid 1.9%.

The Bottom Line

With estimates still rising and valuation still reasonable, MTS Systems has plenty of room to continue running higher.

This Week's Growth & Income Zacks Rank Buy Stocks:

CONMED Corporation (CNMD) recently delivered better than expected fourth quarter results, and management raised its guidance for 2012. This prompted analysts to revise their estimates higher, sending the stock to a Zacks #2 Rank (Buy). CONMED also generated record operating cash flow in 2011, and has decided to use its strong cash flow to reward shareholders through a regular quarterly dividend. It currently yields a solid 2.0%. Read the full article.

Safeway Inc. (SWY) recently initiated its guidance for 2012 above consensus, prompting analysts to revise their estimates significantly higher. This sent the stock to a Zacks #2 Rank (Buy). The company is also returning value to shareholders through stock buybacks and dividends. It currently yields a solid 2.7%. Valuation is attractive too with shares trading well below the industry median on a price to earnings and price to cash flow basis. Read the full article.

Gap Inc. (GPS) recently delivered its 5th consecutive positive earnings surprise. It is a Zacks #2 Rank (Buy). Gap maintains a solid balance sheet and generates strong free cash flow, which has allowed it to buyback millions of shares of its stock while also consistently raising its dividend. It currently yields a solid 2.0%. Valuation is attractive too with shares trading below the industry median on several metrics. Read the full article.

Royal Bank of Canada (RY) delivered better than expected results for its first quarter. It is a Zacks #1 Rank (Strong Buy) stock. Based on consensus estimates, analysts project 14% EPS growth this year and 7% growth next year. On top of this, the company pays a dividend that yields a stellar 4.1%. Valuation is attractive too with shares trading at just 11.7x forward earnings. Read the full article.

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

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