(PDFS) PDF Solutions – Momentum – Zacks Rank Buy

PDF Solutions, Inc. (PDFS) is a technology and service provider for integrated chip (IC) manufacturers, and its shares have been trending higher since reporting its second quarter results on August 8. Currently, this Zacks #2 Rank (Buy) stock is trading around its 52-week high with the potential for further upside.

Q2 Beat on Higher Product Demand

PDF Solutions reported fiscal second quarter 2012 earnings per share of 17 cents, beating the Zacks Consensus Estimate of 11 cents by 54.6%. The earnings surprise was driven by higher revenue generation and cost control measures.

Net sales jumped 31.3% year over year and 9.1% from the prior quarter to $22.5 million, inching past the Zacks Consensus Estimate of $22.0 million. Revenue growth was driven mainly by strength in the Gainshare (Royalty) segment and to a lesser extent by the Design Solutions segment. Royalty income increased on the back of a higher yield witnessed by IC manufacturers.

The company’s gross margin improved 371 basis points from the year-ago quarter to 60.5%. Margin expansion was mainly attributable to higher contribution from Gainshare.

Looking Forward

Though the company did not provide a quantitative guidance for the quarters to come, it would be prudent to mention that continued higher contribution from Gainshare could act as a catalyst going forward. Foundries are expected to be one of the strongest segments of the semiconductor market this year, driven by demand for mobile devices. Given that PDF Solutions provides yield management solutions and has companies like Global foundries and Samsung, growth rates should be sustainable through the year.

Earnings Momentum on the Rise

Analyst coverage of the stock is limited. However, the one estimate for the company was raised following the earnings release, sending the Zacks Consensus Estimate for the third quarter upward by 7.7% to 14 cents.

Full-year 2012 estimates also advanced, with the Zacks Consensus Estimate jumping 16.0% to 58 cents per share.

Valuation is Justified

PDF Solutions shares are up 72.7% year-to-date compared with a 10.7% increase for the S&P 500.

Shares are trading at a P/E of 20.6X with respect to the peer group P/E of 17.7X (premium of 16.3%). This appears justified given that the 1-year return on equity of 19.9% is above the 17.1% average for the peer group.

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PDF Solutions, an ace provider of yield improvement technology and services, competes with KLA-Tencor Corp. (KLAC), Applied Materials Inc. (AMAT), Mentor Graphics Corp. (MENT) and Synopsys Inc. (SNPS). The company’s shares have traded at a premium to its rivals.

The significant increase in the stock price in recent months was on account of the encouraging sales trend and consistent earnings surprises. The stock is currently above its 50 and 200-day moving averages of 9.78 and 8.77, respectively.

Trading volumes are considerably lower than its peers.

California-based PDF Solutions, Inc., a 20-year old company, designs technologies that help in improving yield of semiconductor ICs. Its software and services enable semiconductor companies to improve their manufacturing process, which helps them to market products in huge volumes, faster. Prime customers of PDF Solutions include Toshiba Corporation, Samsung Electronics and IBM Corp.

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