A Stock for a Shrinking World

08/13/2012 11:45 am EST

Focus: STOCKS

Marc Gerstein

Editor, Forbes Low-Priced Stock Report

The world continues to get smaller, in a literal and figurative way. Advances in nanotechnology mean all our electronics are now smaller and more powerful...and that trend is just beginning, writes Marc Gerstein of Forbes Low-Priced Stock Report.

Industry experts differ over whether MEMS (micro-electromechanical-systems) is the same as nanotechnology or just something similar. But two things are clear regarding MEMSIC (MEMS), which produces MEMS-based sensors.

First, the firm is benefiting from new opportunities that are becoming available as a result of being able to manufacture at extremely small sizes (dimensions ranging from less than a micron, each of which is a millionth of a millimeter) to several millimeters. That’s the exotic aspect of this story.

Second, the company already has a meaningful revenue base, and its operations are already hovering near breakeven; ex a goodwill writeoff, trailing 12-month profit was 4 cents a share. That’s the practical part of the story.

Annual revenues from calendar 2005 (the first reported year for this company, which went public in 2008) through 2011 in millions of dollars were $9.1, $13.1, $25.3, $22.1, $28.4, $38.7, and $68.2. That’s a pretty impressive growth pattern; even the decline experienced during crisis-plagued 2008 was quite mild. Gross profit climbed from $6.8 million in 2005 to $27 million in 2011.

Operating profit is more challenging, because it includes research & development, a largely discretionary category of expenditure. Late in the 2000s, MEMSIC started boosting what had been an already significant (relative to its size) level of R&D spending: This rose from $5.2 million in 2009 to $8.7 million in 2010 and $8.6 million in 2011. This has played a big role in restraining EPS, but enhances future prospects.

Meanwhile, cash from operations has been positive every year except 2010, when cash was consumed by inventory building. So despite the exotic aura surrounding MEMS, this company is very much for real.

Indeed, its largest customer is Autoliv (ALV), the well-known well-respected European manufacturer of automotive safety restraints. Sensors that detect position and motion have been a big part of MEMSIC’ business to date, and this has become very important in the automotive market in a basic sense (e.g., to help recognize the need to deploy airbags) and in newer contexts: stability control, rollover detection, headlight leveling, and hill-start assistance.

Notice how MEMS’s sales trends have not really mirrored the ups and downs of auto production. An increase in auto output would certainly be a plus, but this company also grows as a result of increases in per-vehicle use of sensor technology.

Auto is all well and good, but mobile devices seem to have a lot more potential. At one time, that might have seemed a mismatch for MEMSIC’s sensing expertise, but not lately. Notice that modern devices need to detect very fine degrees of motion and position as they decide when to switch between vertical and horizontal orientation, and even when shaken or turned as an aspect of basic game play.

The key, though, to MEMSIC is not motion-controlled sensors, as described above. Instead, the investment case centers around the work it does in MEMS technology, the scope of which is being expanded. For example, newer sensors detect magnetic direction and are being used in compasses (also being incorporated into mobile device location capabilities) and a just-announced product line involving measurement of the flow of gasses.

One downside to this company’s growth pattern is that when it slips, as inevitably occurs for all companies, the shock is large and the reaction harsh. The stock plunged around 50% in May in response to an announcement that second-quarter revenues would be flat year to year due to a drop on sales of a cellphone that uses MEMSIC’s sensors.

Ultimately, though, new products and new markets should keep long-term growth in a strong uptrend. Given that blips in trend are inevitable, it’s better to get in after the news comes out, which we can now do. MEMSIC is a Buy.

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