Novellus Systems (NVLS) just topped earnings estimates, but recent weakness sent stocks lower. However, that just made valuations even more attractive and produced a great entry point.

Company Description

Novellus Systems makes equipment used to manufacture semiconductors and other integrated circuits. The companies products are sold in Europe, Asia and the U.S.

Sales Up 13%

On Apr 21 Novellus Systems reported first-quarter results that included sales of just over $276 million, a 13.1% sequential improvement and almost triple the same quarter last year.

Net income came in at $42.3 million, a 17% jump since the fourth quarter. Novellus reported a $66 million loss one year ago. Adjusted earnings per share was 3 cents better than expected, at 47 cents. This was the third consecutive surprise.

Estimates Spike

All 15 analysts quickly raised full-year forecasts, pushing the Zacks Consensus Estimate to $2.27, from $1.80. This is compared to a 51 cents loss last year.

Novellus is expected to earn $2.85 per share next year, up from $2.34, for another 25 percentage points of growth.

Growth Story

We have seen a surge in demand for semiconductors as optimism surrounding the economic recover increases. However, some analysts feel that the sector is becoming commoditized, i.e. a semi is a semi no matter where it comes from.

This can cut into completive advantages amongst some chip makers. So, moving up the supply chain is a good way to diversifying a chip play rather than picking individual makers.

Enticing Valuations

Due to surging estimates, the forward P/E is not just under 11 times. Those growth rates are also a bargain, as the PEG ration is only 0.6.

The Chart

Recent weakness in the stocks has lead to a rush of profit taking following the good news. If shares remain stable this could be a nice entry point.

A chart for Novellus SystemsZacks Growth Trader service Zacks Investment Research