GT Advanced Technologies Inc. is really advancing yesterday as the crystal growth equipment and solutions provider's shares are up almost 9% on the day. The sharp performance is compliments of an UBS upgrade.
The research firm moved GTAT into the "Buy" column from a "Neutral" rating with a price-target of $10 – 21.4% potential upside to target – not bad.
GT Advanced provides crystal growth equipment and solutions for the solar, light emitting diode (LED), and electronics industries worldwide. The company operates through three segments: Polysilicon; Photovoltaic (PV); and Sapphire.
UBS Analyst, Stephen Chin says, "Our checks find use of sapphire by the major Tier-1 mobile consumer electronics companies is now viewed as a key part of their differentiation strategy. We believe there is a significant increase in the % of sapphire content in the recently launched mobile products such as Samsung's smartwatch and Apple's iPhone 5S."
Making the case for his change of opinion, Chin reasons, "We expect this trend to accelerate as shown in a recently published patent on new ways to incorporate sapphire on display covers by Apple. GT is the largest sapphire equipment supplier and likely beneficiary of this inflection point in mobile devices. . . Our own industry checks last week in Asia found a first ever Tier-1 customer is now set to ramp its sapphire content significantly in 1H14 with 500 furnaces from GT which we believe is for a phase 1 cover screen build out. We increase our 2014 mobile sapphire sales and EPS by $150M (assume 300 furnaces at $500K each) and $0.30 respectively assuming a gross margin of 40%."
If Chin is right, this is a radical shift in sentiment for GTAT. In the tech company's most recent 10-Q, management wrote, "The price for sapphire material has recently experienced significant decreases. We expect that current low prices will continue for some time. Consequently, we anticipate that demand for our ASF systems will also remain limited. Further, customers ! have requested, and expect that they will continue to request, delivery of ASF systems be delayed until the price of sapphire recovers which has delayed the timing of which amounts attributable to ASF systems roll-off of backlog and into revenue and the timing on which we enter into new contracts to sell ASF systems. Additionally, we may receive requests to cancel deliveries, which would reduce our reported backlog."
However, management did add the qualifier, "The use of sapphire in industrial applications and consumer electronics has been adopted to a limited extent. While the use of sapphire in these applications is still in the very early stages, it represents a potential market and may result in increased demand for sapphire manufacturing equipment."
This is where Chin is headed with his brave call as eight of the 11 analysts following GT rate the stock as a "hold", one as an "underperform", and only two see the company as some degree of "buy."
It's been our experience that a lot of money can be made when pivot points are correctly diagnosed.
The current consensus 2014 estimate for GTAT is $0.38 on sales of $567.44 million. We aren't sure what UBS' estimates are for sales and EPS; so, we'll work off the bottom of the current range to set the low bar.
Next year's low EPS estimate is $0.18, let's add $0.30 and use $0.48 for our calculations. The lowball sales number is $467.75 million. We'll tack on another $150 million to arrive at $617.75 million.
For the past five-years, GTAT traded with average price-to-earnings and price-to-sales ratios of 8.31 and 1.4, respectively. With our lowball 2014 EPS and revenue numbers, we arrive at potential price-targets of $3.98 and $7.18 – remember, these are bottom-of-the-barrel figures.
Since GT has not traded with the P/E necessary to hit Chin's $10 target in the last half-decade, P/S is probably a better valuation metric. To hit $10 requires a the specialty-semiconductor to trade at 1.95 times sales, which is above th! e norm, b! ut below the five-year max of 2.5.
Overall: If Stephen Chin is correct that GT Advanced Technologies Inc. (GTAT) sapphire business is at an inflection point, then $10 could prove to be conservative 12-to-18 months from now.
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