Zygo Corp: Bound For The Old Glory Days?

• Price: $16.50
• Forward P/E: 12.2
• Earnings Growth: N/A
• Projected Sales Growth: 20%
• Market Cap: $294 million

Why It's Featured: Great turnaround story; solid balance sheet; strong cash flow; high return on equity.
Danger Zones: Earnings can be volatile; still very small. Zygo Corporation ZIGO designs, develops, and manufactures ultra-high precision measurement solutions to enhance its customers' manufacturing yields, and optical sub-systems and components for original equipment manufacturer and end-user applications in the Americas, the Far East, and Europe. It operates in two segments, Metrology Solutions and Optical Systems. The Metrology Solutions segment offers 3-Dimensional surface metrology products, precision positioning systems, and custom engineered solutions that are used to measure surface characteristics and critical parameters, including topography and roughness, shape, dimension, thickness, optical characteristics, and defects. This segment primarily provides NewView Series 3D Optical Profilers for fuel injector components; ZeGage to measure and visualize various materials, including rubber, paper, metal, plastic, and ceramics; VeriFire Asphere system that provides high resolution 3-Dimensional surface metrology for aspheric shaped surfaces; VeriFire Systems, which are optical systems; GPI and VeriFire systems for the defense/aerospace market; and semiconductor products. It serves automotive, consumer electronics, medical, aerospace, military, materials research, optics, flat panel displays, and semiconductor industries. The Optical Systems segment manufactures high precision optical components and electro-optical systems used in the semiconductor, defense, life-sciences, and research markets. It offers defense-related products comprising lenses, windows, freeform optics and assemblies, and meter class optical components; life-science products, such as laser eye correction, dental 3D imaging, and genomic analysis instruments; and custom components and assemblies used in the manufacture of semiconductor chips. The company markets through a direct sales force, as well as independent agents and distributors. Zygo Corporation was founded in 1970 and is headquartered in Middlefield, Connecticut. This is a small company, only $300 million in capitalization. But at one time (the year 2000), the stock traded at $98 a share. It's been on a roller coaster ride since then that bottomed in 2009 at $3.10. It's recovered nicely and seems headed higher. But it most likely won't be straight up. In 2009, the company lost $3.92 a share. Last year, it lost another 21 cents a share. This year, analysts think it will earn $1.05, then $1.35 in 2012. Revenues followed the same pattern. They were $159 million in 2008, went to $116 million in '09, then lower, to $101.3 million in 2010. This year should finish at 150.1 million (almost a 50% increase), and 2012 estimates are for $180 milion (up another 20%). Evidence of a strong recovery showed in the first quarter (fiscal year ends June 30). Earnings came in at 35 cents a share, the best since 2001. Last year, first quarter was 16 cents. Sales were up by 41% to $44 million compared to last year's first quarter revenues of $31.1 million. Revenues were boosted by larger orders for metrology and optics products. Gross and operating margins hit 10 year highs. Orders for the second quarter were $42.9 million, up 26% compared to last year's orders. Backlog increased to $60.9 million vs $47.8 million last year at this time. In the last month, the company announced 2 new contract awards: a $9 million order for its EUV Micro-Exposure Tool Optics and a $4 million order to produce high precision assemblies used in an ophthalmic medical device for a major medical device firm. The balance sheet is solid. There's $64 million in cash and total debt of $4.2 million. Cash flow is strong enough to pay for capital expenditures and expansion of operations with strategic partnerships and/or buying other companies. This is all very good news. And investors know it. They started bidding up the stock in the last quarter, and it's higher by 60% to a level not seen since 2007. The question is: is all the good news baked into the price already? Only time will tell. Essential Numbers:

• P/E: 13
• Price to sales ratio: 1.79
• Price to book ratio: 2.22
• Operating margin: 16.03%
• Profit margin: 14%
• Return on equity: 20.39%
• Return on assets: 11.26%
• Revenues (last 12 months): $163 million
• Total cash per share: $3.58
• Total debt: 0
• Current ratio: 5.38
• Book value per share: $7.37
• Beta: 1.48
• 52-week change: 40.17%
• Shares Outstanding: 17.88 million
• Float: 11.92 million
• Held by insiders: 10.63%
• Held by institutions: 64.6%
• There is no dividend.

Aggressive investors always like a good turnaround story. This seems to be one of them. After a soul-cleansing loss of $3.92 a share in 2009, it appears management has focused on the right products, services, and efficiencies to jump start Zygo back toward its old glory days. If earnings projections are correct, this stock looks reasonable at these levels. Just remember earnings can be extremely volatile. (For more aggressive ideas, visit our website: www.theonlineinvestor.com) Company Web site: www.zygo.com - Ted Allrich
December 1, 2011