FEI Company Casts a Wider Net

FEI Company (FEIC) reported show stopping numbers the past nine months. Three picture perfect quarters. Sitting high on top of the organizational chart is CEO Don Kania, and he sets the record straight in the August 2nd, 2011, Q2 Conference Call: "We delivered record revenue and earnings for the third quarter in a row...(the most recent one being) the second highest in our history and the highest ever for second quarter with 17% year-over-year growth...".

Investors have taken notice and elevated FEI to its 52 week high of $41 on July 7th, but have since gotten cold feet and stopped it in its tracks, pushing it back to the $33 range where it currently trades. This decrease in price coincided with the general market sell-off which began in the second week of July. It's a solid company with a compelling story, and, if you bought the equity at the 52 week low of $16.50, you're in great shape. You have a double. Market participants with a long term perspective may be rewarded handsomely with a stake in FEI Company. With investors giving the stock the treatment, you may even consider buying the company now, but, before you do, let's look at the overall picture and see what you think.

FEI Company primarily manufactures microscopes for use in nanotechnology. As the most recent 10-K states: "We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications.". CEO Kania expounds upon the future in the Q1 Conference Call: "Looking forward, prospects remain good as the technical demands of shrinking devices continues to increase...". Think Moore's Law where the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years.

The organization has four product segments which are: Electronics (35%), Life Sciences (12%), Research and Industry (29%), and, Services and Components (24%). It has sales and operations in 50 countries around the world of which 68% of revenues come from abroad. The R&D budget is healthy, and plans for expansion address the potential increase in market share. CEO Kania explains this in the Q2 Conference Call: "As the year progresses, we expect R&D spending to expand to our target of 11%. We believe this level of spending is matched to our strategy to double our served available market by 2014.".

Doubling your market in three years is a hefty goal, but in the past five years, FEI Company has done an impressive job of broadening their customer base to industries beyond their previous core competency. Portland Business Journal writer Erik Siemers reflects upon this in his May, 20th, 2011 article Hillsboros'a FEI Busts Boundries: "FEI - whose microscopes average $1 million in price but can go as high as $6 million - was once heavily reliant upon the the semiconductor manufacturing market. As recently as 2004, the company's sales were split evenly between semiconductor manufacturers and research institutions, with a sliver going to customers in the data storage industry. Over the past five years in particular, the company has successfully penetrated new markets including life sciences and heavy industries such as mining, automotive and aerospace manufacturing.".

The article goes on to say that: "Its next target is the oil and gas market...FEI's technology can examine pieces of rock from a mine or oil well to discover its exact mineral content. That can help operators decide weather they've drilled far enough...In an industry that spends several billion dollars each year exploring for natural resources, the opportunity for FEI is plentiful. In a way, it could be the microscopy industry's equivalent to a gold rush.".

FEI isn't part of the old-boy network, but they have been around since 1971, and, went public in 1995. This is a company with good DNA. I examined their numbers going back to 2001, and, sure enough, it's been a history of boom and bust cycles. Earnings appear to be on a linear rise the past few years, albeit lumpy on both an annual and quarterly basis. However, this is an old pattern for them and, as a result, the security keeps getting tripped up once the market gets wind of inconsistent earnings results.

Their Achilles' heel was once being a prisoner to the ebbs and flows of the semiconductor cycle, but they are still subject to the seasonality of the technology sector. As the 10-K points out: "Our history shows that our revenues and bookings normally peak in the fourth quarter. Bookings are normally lowest in the second quarter and revenues are normally lowest in the third quarter...". They are currently in the third quarter and this may mean more pressure on the share price.

Although they've established a beachhead in additional industries like oil and gas exploration, you may be still be paying a price premium for FEI Company. At least in the near-term. As CEO Kania explains in the Q2 Conference Call: "...we are prudently planning for Electronics orders to be down in the third quarter. Based on discussions with customers, we expect the rebound in the fourth quarter as substantial technology challenges continue to face the industry.".

The company's P/E Ratio for 2011 is 14.35 which is historically low for FEI. Since 2006, the average annual P/E Ratio has been close to 30, except for last year when it was 17. Yahoo Finance consensus analyst estimates doesn't have much information available in regards to current or projected earnings. I used ValueLine metrics for most of my calculations. Yahoo Finance does state that on a five year compound annual growth rate, FEI Company is slated to grow at 11.67%, and, revenue is going to grow from $824 million in 2011 to $870 million in 2012. That's under 10%.

Going back to ValueLine, they believe that for 2012, top-line growth will be only 5% and earnings will come in at a pace of 9%. That's fairly close to the Yahoo Finance estimates. ValueLine is also concerned with the health of the global economy and FEI's symbiotic relationship with the semiconductor industry. This may put a damper on share appreciation for the next twelve months. I concur with their assessment, but not without some reservations.

In my personal portfolio, I believe the financial markets are on life-support, so I've remained short, or, in cash positions for the last year and a half. However, if I am wrong, and, other naysayers are wrong, then organizations like FEI Company could make you a boatload of money. The profits may be mind boggling. The market has been fascinating theater of late with a global recession looming and governments worldwide putting their fingers in the dikes. However, if we do get a continued rebound in the indexes, then in the short-term, a company like FEI would be the way to go. If history is any indication, they should have a terrific 4th quarter.

Teradata: A Step Above in Business Intelligence

"Big Data" is an expression that's crept into the lexicon of IT professionals across the corporate landscape. Teradata (TDC) is the top of the line in big data warehousing and data extraction with their software, hardware, consulting and support services. However, they are not alone in the field. Primary competitors IBM, Oracle (ORCL), SAP, and, to a lesser extent Informatica (INFA), are no slouches and are putting up a fight. Teradata is trying to outflank the market with their recent acquisitions of Aprimo and Aster Data. This allows them to integrate their offerings in the cloud and gives them an upper hand, but in no way gives them a license to run the table.

If you aren't familiar with the concept of big data, it is a play on the burgeoning growth of the new services Internet 2.0 has presented us. According to the most recent Teradata 10-K: "...examples include web logs, radio-frequency identification, sensor and social network data, Internet text and search indexing, call detail records, genomics, astronomy, biological research and military surveillance information, medical records, photography archives, video archives, and large scale eCommerce data.". The whole shebang. Just about anything we do with Internet applications.

We have ignition in the volcanic rise in all of this information, and, Teradata CEO Michael Koehler brings it all to a head in the Q1 conference call: "Looking to the future, the explosion of data will continue. IDC says this explosive growth means that by 2020, our digital universe will be 44x as big as it was in 2009. Whether data grows by 44x or 22x by 2020, it's a lot of data corporations will need to manage and extract value from.".

Going a step further, in Teradata's Q2 conference call, CEO Koehler explains: "All of this big and complex data presents an opportunity and a threat to corporations. The one's who are able to manage the data and extract new insights and precision from it will have an advantage over their competitors. The corporations that don't manage this data explosion and extract value from it, will be stuck with the cost of the data and will be at a competitive disadvantage.".

A probable scenario in active data warehousing was given in the August 4th, 2011 S&P Report on Teradata by analyst Thomas Smith: "...a business's call center could produce raw data on call attributes (e.g., number of calls, duration, agent, customer, dropped calls, results), which could be a starting point for mapping and analyzing overall interactions with customers, including Internet communications, which could then become the basis for a plan to improve customer satisfaction.".

Another example is given by Teradata CIO Stephen Brobst on May 4th, 2011 in an article by Arima Salah-Ahmed in Daily News Egypt: "If I introduce a new product or service, I can get immediate feedback that would've taken months through focus groups and research. I can readjust my pricing and market position immediately with that data.".

Teradata is attempting to get control of the information asylum by going for the jugular. As mentioned earlier, with the acquisitions of Aster Data and Aprimo, the company now throws its weight around in the explosive arena of cloud computing. Aster Data was purchased for unstructured big data and Aprimo was absorbed for integrated marketing management and applications.

Mr. Koehler talks about the Aprimo move in the Q1 conference call: "Moving on to Aprimo. The acquisition has made Teradata a leader now in integrated marketing management...But in addition, Aprimo serves as a foundation to build out more applications and to leverage their Software as a Service and Cloud capabilities more broadly, longer term.....we have already merged our existing Teradata applications into Aprimo.".

It should be noted that according to Chris Kanaracus from the IDG News Service in a posting titled Teradata Buys Aster Data, Boosts 'Big Data' Wares: "Aster Data's platform is also available for cloud-based deployments on Amazon Web Services, AppNexus, Dell's Data Cloud, and Terremark...".

Although there is the potential for good, solid growth for Teradata from new customers in the largest 3,000 global companies, there is also the aspect of additional business from its existing client base. As the most recent 10-K points out: "Data warehouses are typically built one project at a time. For example, an initial data warehouse may start with a single subject area, which forms the foundation of data that is available to be leveraged for the next project, and so on. Therefore, a customer with a large order in one quarter is likely to generate additional revenue for subsequent periods.".

Head honcho Koehler discusses the future going forward for the company in terms of sales and earnings growth in the Q2 conference call: "...as we look out longer-term, we're looking at a minimum of 10% of revenue growth over the longer term. And over the longer term, we're looking at earnings per share growth of 1.5x at revenue growth. I think shorter term, we have an opportunity like we're seeing right now for higher revenue growth, but maybe not as robust of an EPS growth relative to the revenue growth that we're making.". That near term revenue growth he is referring to is also discussed in the same transcript: "Turning to guidance, we are increasing our revenue growth guidance for 2011, from a range of 14% - 16% to a range of 18% - 20%. And we're increasing EPS from a range of $2.13 to $2.23 to a range of $2.20 to $2.28.".

Nothing gets an investor's blood boiling like a miss on heightened expectations, and, Teradata has been handcuffed since the CEO reported its numbers on August 4th, falling from a price of $54 to its current valuation of roughly $45. The sinkhole the stock has fallen into can be attributed to the overall market sell-off, but it was also trading at a fairly lofty valuation.

Consensus earnings estimates on Yahoo Finance give Teradata an EPS of $2.26 for the current year which gave it a P/E Ratio of 25 at $56/share. Not too expensive, but for a company which is slated to grow at a five year CAGR (compound annual growth rate) of 13.88%, you can find a better entry point. Many investors can't contain their enthusiasm about the prospects of the markets going forward, like they are going to make beaucoup bucks by putting their money on any security in the technology space. I don't believe that to be true. This is no ordinary recession we are experiencing. As of this writing, Teradata's P/E Ratio is 20. A very tempting valuation, but still too expensive for me as earnings contract on a global scale.

I don't mean to be heavy handed with a company like Teradata. It's a quality organization that was formed in 1979 and spun out of NCR in 2007. R&D is 7.6% of 2010 revenues which is a plus. It operates on a global basis with a footprint in 60 countries. It also has a broad customer base with the top ten customers accounting for only 16% of revenues. If you get the opportunity to read any of their conference call transcripts, you'll be impressed by the heavy hitters they do business with. For an example, eight of the top ten retailers utilize Teradata, companies like Walmart (WMT) and Best Buy (BBY). I'd like a quality equity like Teradata for my portfolio, but until the global debt situation is resolved, I'll just watch and wait.

On The Big Stage With Rackspace Hosting

Cloud computing has been all the rage the past few years, and, rightfully so, because it's where a majority of the growth is in the technology sector. If you want to make money, just hitch your wagon to a company in the cloud space, and you'll probably profit in the long run, especially after the recent sell-off in the markets. As scribe Tim Weber of the BBC News reported in his May 19th, 2011 article Cloud Computing After Amazon and Sony: Ready For Primetime?: "According to a new global study by IBM, more than 60% of organizations plan to embrace cloud computing over the next five years to boost their competitive advantage.".

Rackspace Hosting (RAX) is a "pick-and-shovel" cloud company that does just what its name suggests, hosts organizations' software on its servers located in data centers throughout the globe in places like the United States, the United Kingdom and Hong Kong. As described in their most recent annual report: "Our services are sold to businesses in more than 120 countries...as of December 31st, 2010, we served more than 130,000 business customers and we managed more than 66,000 servers, 2,100,000 e-mail accounts, and 417,000 hosting domains. No single business accounted for more that 2% of net revenue in any of the past three years".

For just a bit of background information, cloud computing is an extension of hosting. With just your plain old vanilla dedicated hosting, a customer specific dedicated server will be housed at a Rackspace data center, and, clients have full administrative responsibilities and privileges. It's still a do-it-yourself environment although you don't have to go out and buy a server, you just rent one.

In regards to the cloud, as written in the 2010 Rackspace annual report: "Cloud computing refers to pooled computer resources, delivered on-demand over the Internet. Cloud technologies allow us to effectively provision and manage a pool of computing resources across a layer base of customers and deliver more computing resources to a business when they need them.". A good example of a company needing additional computing resources would be a retailer from Thanksgiving through New Year's, or a bank at the end of the day when they process all of their transactions. Clients usually pay by the gigabytes of bandwith consumed.

Rackspace Hosting is no fly-by-night organization with a get-rich-quick-scheme. It has been around since 1998 and has slowly built their company into one of the more dominant players in the hosting sector. As CEO Latham Napier states in the Q2 2011 Earnings Call Transcript: "Although it has taken us nearly 12 years to achieve our fist $1 billion of run rate revenue, we believe it will take a fraction of that time to attain a second...the cloud computing era represents the biggest market opportunity in all of technology. One that could represent a multi-billion dollar revenue stream for Rackspace, and we've only just begun to tap into that opportunity.".

The Rackspace growth strategy is to give what they refer to as 'Fanatical Service' and to build relationships slowly with the larger entities in the global marketplace. CEO Napier discusses this approach in the Q2 Conference call: "Obviously there are only 500 companies in the Fortune 500. And so if you look at the top 100 of those, we only serve half of them...So we have a good opportunity with the other half because our share of the wallet is so low with these guys...our upgrade potential with enterprise customers is exceptional.".

As a growth story, Rackspace Hosting really found its groove the past four years. In a June 2nd, 2011, Bloomberg Businessweek article How Rackspace Beats the Behemoths, author Ari Levy points out: "Since 2007, Rackspace's sales have grown by an average of 30 percent every year, and analysts expect net income to climb 49 percent this year...Wall Street has caught on: Rackspace shares are up almost tenfold since early 2009...Customers include 40 percent of the top U.S. companies by revenues".

Although this is a battle tested company, it still needs to get up to speed in regards to its cloud offerings because it is still primarily a hosting company. CEO Latham Napier didn't break down the business segments in the conference call, but as Reinhardt Krause accentuates in his August 1st, 2011 article Rackspace Using Open Source To Compete Vs. Amazon in Investor's Business Daily: "Analysts say it's key for Rackspace to expand cloud services because that business is more profitable than its low-margin hosting business.".

In cloud hosting at this juncture in time, it basically boils down to two companies ready to duke it out; Amazon (AMZN), which uses its proprietary software that is unique to Amazon, and, Rackspace Hosting which utilizes an open source platform called OpenStack. Amazon is by far the leader in the industry, but Rackspace is snapping at its heels according to the previously mentioned article Rackspace Using Open Source To Compete Vs. Amazon: "Many companies that buy cloud services prefer open standards because it gives them more choice among service providers and computing hardware.".

To give a brief description of OpenStack, Vance Cariaga of Investor's Business Daily will do the honors in his April 19th, 2011 piece titled Rackspace's Big Customers Keep it on Cloud 9: "OpenStack is an open-source platform that provides computers and storage. It was co-developed by Rackspace and NASA and is now supported by big names such as Intel (INTC), Microsoft (MSFT), Citrix (CTXS) and Advanced Micro Devices (AMD).". This sounds great but, let's not forget that Nokia (NOK) tried the same strategy with their Symbian Operating System and that was given the kiss of death with the advent of the iPhone and Android smartphones.

In fact, although Rackspace was one of the original developers of OpenStack, it doesn't guarantee a steady revenue stream. Going back to the Reinhardt Krause article: "While Rackspace won't garner revenue directly from OpenStack, companies that use the platform might well require the company's support in building out cloud-based data centers.". In the Q2 Earnings Conference Call, CEO Napier states that only by the end of 2012 will they begin to see any sales traction from OpenStack build-outs. That's well over a year from now and anything can happen, especially to a stock that may be overvalued in a volatile stock market. Let's see if the equity measures up and is ripe for your portfolio.

Consensus analysts estimates on Yahoo Finance Earnings Estimates give Rackspace $0.52/share for 2011 and $0.79/share for 2012. If we go by its closing price of $35 as of this writing, we get a current P/E Ratio of 67 and for 2012, a P/E Ratio of 44. Those same analysts give it a growth rate of 18.71% for the current year and only 10.76% for 2012. A PEG Ratio with those estimates breaks out to 3.6 for this year and 4 for the next. That's really pushing your luck for just a hosting company. In fact, you'd be in way above your head for any company. On a positive note, those same analysts, believe the 5 year Compound Annual Growth Rate will be 34.8%, so they see tremendous opportunity from 2013 to 2016.

Where analyst opinions are concerned, Yahoo Finance Analyst Opinions breaks Rackspace Hosting down to 14 that have a hold, while 5 say to buy and 6 contend it's a strong buy. I think it's time to batten down the hatches with this equity, especially in a market that is in a corrective mode. I am not suggesting that Rackspace will have the same fate at Exodus Communications, a hosting company that was a market darling back in the dot com craze of the late 1990's. Exodus went bankrupt after only a few years in business from expanding too fast, however, they were flavor of the month for awhile. Rackspace is in a good position to take market share from Amazon, but they must first monetize their OpenStack initiative before I would put money down on an organization with such high valuations.