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Shares of Ultratech, Inc. (UTEK - Snapshot Report) are trending upward since this technology provider for the semiconductor and nanotechnology markets reported second quarter results on July 19.

Currently, this Zacks #1 Rank (Strong Buy) stock is trading around its 52-week high. There is also potential for further upside based on Ultratech’s solid growth projection for fiscal 2012, its transition to 28 nanometer logic devices and its rich patent portfolio (which includes IBM Corp.’s (IBM) semiconductor packaging patents).

Q2 Beat on Higher Product Demand

On July 19, 2012, Ultratech reported fiscal second quarter 2012 earnings per share (EPS) of 41 cents, beating the Zacks Consensus Estimate by 5.1%. Net sales jumped 9.6% over the comparable prior-year quarter and 19.0% from the prior quarter to $59.1 million, surpassing the Zacks Consensus Estimate of $55.0 million.

Bookings increased about 12% from the prior quarter, while backlog grew 7% in the past six months.

The revenue advance was driven by a 10.0% increase in Product revenue, as demand for Ultratech’s advanced packaging, laser-processing and HB-LED (high-brightness light emitting diodes) systems increased. Revenues from the Service segment grew 7.4% year over year, while Licenses dropped 23.1%. Region-wise, contributions from Europe and Asia were encouraging.

Gross margin improved 326 basis points from the year-ago quarter to 54.2%. Margin expansion was mainly attributable to lower service and manufacturing costs, as well as better capacity utilization, partially offset by higher material costs. Despite a 12.1% year-over-year increase in operating expenses, the operating margin increased to 22.3% from 19.9% in the year-ago quarter.

2012 Guidance Raised

Expecting the second quarter momentum to continue, Ultratech remains upbeat about the second half of fiscal 2012. Despite a bleak spending environment and an expected drop in semiconductor capital expenditure, the company expects solid bookings growth, favorable backlog and transition to 28 nanometer logic devices. Ultratech will be ready with a significant number of laser processing systems (for semis) to meet the increasing demand at the 28nm node. The company also believes that cancellations or push outs will be limited.

Orders for LED systems are expected to be higher in the second half of the fiscal year than in the first.

Upbeat second half expectations led Ultratech to raise its fiscal 2012 guidance. The company now expects revenue growth of 5%–10% (previously flat to up 5%) and EPS growth of 10%–15% (previously flat to up 10%). Gross margin is expected to be approximately 55%.

Zacks Consensus Estimates Rise

Following the earnings release, the Zacks Consensus Estimate for the third quarter gained 5% to 42 cents, as 3 of 4 estimates were revised higher.

The Zacks Consensus Estimate for 2012 rose 4.3% to $1.68 as all 4 estimates were revised higher in the last 30 days.

Valuation Is Attractive

Ultratech shares are up 31.3% year-to-date, compared with a 9.7% increase for the S&P 500.

Shares trade at a P/E of 20.1X with respect to the peer group P/E of 74.8X (discount of 73.1%). Coupled with the 1-year return on equity of 14.3%, this indicates a strong possibility of further upside.

6-Month Chart

Ultratech competes with Mattson Technology Inc. (MTSN), Applied Materials Inc. (AMAT) and CSR plc (CSR) in the semiconductor equipment space. The company’s shares have traded at a premium to its rivals.

The significant increase in the stock price in recent months was on account of the encouraging sales trend and earnings growth momentum. The stock is currently above its 50 and 200-day moving averages of 30.98 and 29.70, respectively.

Trading volumes are considerably lower than its peers.

Founded in 1979, California-based Ultratech, Inc. provides photolithography and laser thermal processing equipment to the semiconductor and nanotechnology markets. Within the semiconductor industry, the company’s solutions target advanced packaging applications and advanced annealing applications. Within the nanotechnology industry, the company’s products are used in the manufacture of thin film head magnetic recording devices, ink jet print heads, and HBLEDs.

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