Backing a Nanotools Superstar

06/07/2007 12:00 am EST

Focus:

Josh Wolfe

Editor, Forbes/Wolfe Emerging Tech Report

Josh Wolfe, editor of the Forbes/Wolfe Nanotech Report, finds a diversified nanotech instrument maker that should profit from the growth in nanotech research and development. 

Every company, every research facility, and every university that intends to embark on a nanotech venture needs the instrumentation to do it. Investing in these go-to tools companies appears to be a no-brainer. But even the seemingly stable nanotools sector has had its superstars and its underachievers.

If there's one nanotools superstar, it's FEI Company (NASDAQ: FEIC), headquartered in Hillsboro, Oregon. The company's core technologies are electron and ion optics—essentially particle beams used in microscopes that can image and analyze structures at the submicron scale, even in three dimensions. These core technologies have given rise to instruments including scanning electron microscopes (SEMs), transmission electron microscopes (TEMs) and DualBeam technology.

The market potential for these tools is vast and expanding. FEI closed out [the first quarter] with the highest earnings in the company's history. At $148 million, sales were up 32% from the first quarter of last year, bringing its total cash and investments up to $425.7 million. The company's gross margin for the quarter was 43.1%, compared with 40.8% [in last year’s first quarter].

Over the past two years the company has undergone internal restructuring to help reduce manufacturing costs. [In the first quarter], operating costs fell nearly 10% from 2006. And then there are the products. The company has introduced the Titan, the highest-resolution microscope in the world, [and] the brand-new Phenom-ED Scanning Electron Microscope, the first tabletop [low-cost] SEM.

Things are only looking up from here for FEI. "I think FEI has the ability to push its margins up to the mid-45% range," says analyst Mark Miller of Brean Murray Carret, [who thinks business] “will pick up later this year and early next year."

FEI boasts an impressive record backlog of orders of $310.5 million, of which 90% is expected to ship by the end of [the first quarter of 2008].

The lesson seems to be this: If you are going to supply the basic, fundamental, essential tools for the nanotech industry, you have to keep your customer base as broad as possible and continually work to penetrate new markets.

Nanotools companies are entirely reliant on the budgeting trends of the markets they serve—if one of their target markets takes a downturn or passes through the low point of a cycle, they need additional target markets to offset the loss. This, of course, means both maintaining an active product pipeline and reaching out to new clients. FEI has been able to do this.

When looking at nanotool companies with an investor's eye, you have to look for growth, top-of-the-line products and range of applicability. FEI scores high for all three criteria. (The stock closed near $36 Wednesday—Editor.)

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