BRKS Analysis – 1Q 2013

BRKS AnalysisBrooks Automation (NASDAQ:BRKS) just popped up on my stock screener one day…

And I’m glad I took a closer look. Here’s an analysis for you on why I think BRKS is an interesting investment idea…

BRKS Analysis – Business Fundamentals

BRKS is in the business of automation, vacuum and instrumentation solutions. Their end users are high tech manufacturing industries (think semi-conductors and life sciences). BRKS has solutions to help keep those assembly-line robots working well.

And in general…

You should understand I’m very bullish on automation. Maybe it’s a bias. But I use it in my own job, and it’s massively helpful. Technology can be very transformative, it can do the work of 10 people, without lunch breaks. The right technology implemented effectively can really provide a quantum leap forward in productivity, – investors be warned!

But transformative technological hype aside…

BRKS is a best in class automation company. They have strong products and are best positioned in the 450mm market, which should heat up, (if OEMS ever ramp up production). Another recent strategic move to analyze is the recent acquisition of Crossing Automation by BRKS. Truthfully…

Acquisitions usually make me weary. But in this case…

Management and the CEO appear to be on point. I know this is a little subjective but, they’ve recently demonstrated a strong focus on growth, and are executing their strategic plan with discipline. Their move into the well-capitalized life sciences industry this past year is a great start.

And you know what?

Based on my own scientific background: I appreciate first hand how scientists need automation solutions to accelerate research. I am curious to see how this new life sciences business unit will contribute to a BRKS analysis a year from now, know what I mean? So, by now you must be wondering…

What do the financial statements look like?

BRKS Analysis – Fundamental Valuations

In my fundamental analysis of BRKS, I came to believe that it was a growth stock, without any expectations of growth priced in. An interesting discrepancy indeed…

The price to earnings ratio is a modest 5.19! Really? BRKS is managing the downturn in demand well. But c’mon…

At some point:

Business will pick up. Semiconductor manufacturers will need to upgrade their equipment eventually. And at that point, (assuming management keeps us on track) you can expect multiple expansion. It might take awhile but…

My patience is buffeted given that BRKS is well positioned in their market, and are successfully finding new revenue streams. And beside that, there’s another very interesting point to consider about this stock idea.

BRKS has cash (net $1.64/share), and is currently trading below book value per share ($10.11). Personally, that margin of safety is a bit tight for me. So I’d like to buy the stock on any technical pullbacks (which assumes the fundamental thesis isn’t subject to change!)

Oh yeah…

The other things I like about BRKS is the 3.4% dividend, not to mention a perfect debt/equity score of zero. All signs that management is allocating capital effectively, (if the 21.66% ROE didn’t tip you off).

So:

Now that you have a solid foundation on the fundamentals of the Brooks Automation business, let’s look at the price action of BRKS…

BRKS Analysis – Technical Summary

I like to start my technical analysis of BRKS by showing you a long term view. It’s easy to see BRKS has been building a base. But don’t you think it could still be rangebound for awhile before technicals force any big move? That’s kind of how I see it.

BRKS Analysis - Monthly

BRKS Monthly Chart – click to enlarge

And then…

When you zoom in on the daily chart, you can see that BRKS is flagging a bit. I own the stock from $8.60 and might consider adding around $9.30 but would like to see the stock base up more, after it’s most recent pump higher.

BRKS Analysis - Daily

BRKS Daily Chart

As the 200 day moving average begins to slope up, we might very well see some buying. But given the thin volume of this security, there’s likely to be so volatility. So I’ll probably hold off until the convergence of the 200, 50, and 20 day SMA realigns. Call me old fashioned.

By the way…

Keep in mind the $10.50 area has acted as meaningful resistance to BRKS in the last couple months. So you can use that as a near-term sell target if you are swing trading part of your investment (though keep in mind, my ultimate sell target is closer to $13).

So to summarize my BRKS Analysis:

I still think this chart needs some time to firm up. And given my fundamental valuation above, (which mandated a larger margin of safety), I am comfortable sitting on my hands for now and waiting for the setup to come to me. The truth is…

The stock is a little too close to book value, even with the growth potential. I believe you will see a better entry point in the next month or two. With stock futures pointing down this morning that opportunity may come sooner than later. For example, I would like to see it back down closer to $8 or less. Then it’s really a steal.

Often patience is the best option (and it doesn’t come up with a transaction cost!)

Disclosure: I own a 1/4 position around $8.65 (but would like to add more below that price)

Update

Watch this short BRKS video analysis for an updated technical analysis of BRKS…

After this BRKS Analysis: Do You Think Brooks Automation is a buy?

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