Initiating a Buy on Eagle Test

Eagle Test Systems, Inc. (EGLT) designs, manufactures, sells, and services automated test equipment (ATE) for the semiconductor industry. December top- and bottom-line results surpassed consensus estimates, and guidance calls for flat to 10 per cent revenue growth, while the overall market in semiconductor looks tepid. Management estimates net revenue will be between $30 and $34 million in the second quarter ending March 31, 2008.

The company estimates earnings per share will be between US$0.17 and US$0.24 based on an estimated 23,200,000 fully diluted common shares during the above mentioned period. The firm has a large customer concentration from Texas Instruments (TXN - Analyst Report) (45% of revenues), but it has been expanding its customer base for several years and continues to reduce the percentage of sales from this one customer.

EGLT is trading at 10.3x multiple to our 2009 estimated earnings (P/E). EGLT's business and operating results depend significantly on the level of capital expenditures by companies in the semiconductor industry.

Historically, the semiconductor industry has been highly cyclical with recurring periods of oversupply and under-supply, which has resulted in wide fluctuations in demand for test products. These demand fluctuations have resulted in significant variations in revenue, expenses and results of operations, yet the firm has significantly broadened its revenue base to where it is not reliant on one business or client.

The balance sheet has improved every year since 2004 as cash has climbed to $112 million. We are initiating our coverage with a Buy rating of EGLT and setting a six-month price target of $14 or 12.5x 2009 estimated earnings.

Read the full analyst report on EGLT.

Read the full analyst report on TXN.