The hot television deals of "Black Friday" bring me back to the shares of Orbotech Ltd. (Nasdaq: ORBK), which has recently been showing signs of awakening. Orbotech is the biggest supplier in the world of systems that inspect flat screens for TVs, but also for smartphones and computers of all types. In addition, it is among the biggest suppliers to the manufacturers of complicated printed circuits which are inside the smartphones.
Despite the stock market rally since early September, Orbotech's share has been weak and reached a low of slightly above $9 only a month ago. Investors "punished" it for a weak television market, which suffered from a lack of demand and from overstocked inventory since the end of the World Cup in the summer. The strong results it reported at the beginning of the month, proved to what extent Orbotech's business is not sensitive to monthly or even quarterly volatility in the TV market. Since the bottom in October, the share has risen over 20%.
Last week, Oppenheimer analysts Avivit Mane-Kalil and Sergey Vastchenok met with Orbotech management, which led them to reiterate a "Buy" recommendation with a price target of $15, compared with a market price of $11. The flat panel display market (FPD) contributes 59% of the company's sales, compared with 38% that comes from printed circuit boards (PCB). The rest comes from operations which so far have contributed minute amounts.
In the sector of inspecting TV screens, a shopping season which is more strong or less strong does not significantly impact Orbotech operations, because it has a pipeline which is made up of orders for the medium and long term, which it receives from TV screen manufacturers who are building new factories in China, or who are expanding existing lines in Asia for the giant Chinese market.
Expected demand in China
The rate of penetration of flat screen televisions in China is still very low, under 10%, and so in the coming years, because of the consistent rise in the quality of life and because of government incentives to support consumption, expected demand is for tens of millions of televisions each year.
Recently the Chinese government authorized setting up facilities on a collaborative basis with producers from outside China itself. In 2011, for example, 3-4 new factories are expected to be built. Estimates are that each one of them will contribute to Orbotech over $50 million in inspection equipment orders.
In the circuit industry, the analysts point to a revolution in recent years, in which Orbotech switched from a company that sold only inspection systems, to a company which also supplies machines for the production process of the circuits themselves. These are very intricate flexible circuits, in mass production, for, among other products, iPhones and iPads and similar items. Demand for Orbotech's laser machines, LDI, grew significantly, and already is responsible for about 20% of the company's sales, and is expected to continue and grow, in parallel with the jump in demand for smartphones and tablet computers.
Orbotech also entered in the past two years an entirely new sector, solar energy, and in the current quarter is beginning a preliminary trial at a customer which is a leader in the field. These are systems to improve the utilization of existing solar panels by around 30%. This is a potential target market of hundreds of millions of dollars, which will begin to contribute to Orbotech beginning in 2012.
In light of the diverse potential listed above, which includes the Chinese market, the market for smartphones and tablet computers, and in the future the green energy market, Orbotech's share in my opinion is one of the cheapest there are today, if we take into account its multiples for the coming year. Its price to earnings ratio is under 7, and its price to sales ratio is less than 1, based on Oppenheimer's forecast for 2011.
Published by Globes [online], Israel business news - www.globes-online.com - on November 30, 2010
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