Aehr Test Systems: Semiconductor tester bucking a downturn

The semiconductor business is a cyclical one, and right now it seems to be on the rinse cycle. A soft market in the first half of this year is washing out some of the profits of the chipmakers, and the weakness is trickling down to the companies that supply them with the equipment to make and test the chips.

An exception, however, is Aehr Test Systems (Nasdaq: AEHR), a Fremont, Calif.-based seller of semiconductor test equipment that has been largely ignored until recently. It offers two new test systems that are more efficient than anything else on the market, and are especially good at testing popular flash memory chips. One customer, at least, is buying the new gear and subsequently boosting profits.

In the second fiscal quarter ended last November, Aehr reported revenues of $9.7 million, up 56% from a year earlier, and up 26% sequentially. Pro forma net income, at $1.6 million, is up 83% from a year ago, and 62% sequentially.

The stock price has risen about 40% since earnings were announced on Jan. 7, but the company is still ignored by many investors. At just under $8 during trading on Friday, share prices were up nearly 30% from a year ago. Shares have traded between $5.41 and $8.27 over the last 52 weeks. Ramesh Misra at Collins Stewart (which makes a market in Aehr stock and expects to seek investment banking business from the company in the next quarter) is the only analyst currently covering the stock. Misra thinks that’s because large investors have no interest in small volume stocks and their banks have dropped coverage. But he believes that Aehr’s customer base is likely to expand soon, and will “boost its image among investors.”

Misra has a target price of $12, about 10 times his FY09 (May) earnings estimate of $1.15 per share. It’s currently trading at about 7.6 times his earnings estimate of $1.04 per share for calendar year 2008, still making it a bargain. (Credence is currently trading at 36 times its forward P/E, even though it’s dropped about 70% in the last year.) In his Jan. 8 report, Misra wrote that Aehr is “among the few semi-equipment stocks that is downright inexpensive.”

---You can read the FULL article when you register (registration is free!) or sign-in to SmallCapInvestor.com---