inTEST Corporation: Doubling In 2-3 Years Could Be Possible (NYSE:INTT)

Thesis

inTEST Corporation (NYSE:INTT) is a $116-million cap semiconductor equipment company that has been inconsistently growing with a CAGR of 14.1% over the past 10 years:

As we can see, growth has accelerated over the last 3 years [the 3-year CAGR is now 23.2%]. I believe that the business development strategy INTT has chosen for itself will help the company to continue to grow rapidly in the next few years due to: 1) smart acquisitions, 2) organic market growth, and 3) quite a low valuation amid modest expectations, which are the main reasons for this.

Business Overview & Financials

According to the company’s IR website, inTEST Corporation, headquartered in Mt. Laurel, New Jersey, is a global provider of innovative test and process solutions for use in manufacturing and testing in a variety of markets, including automotive, defense/aerospace, industrial, medical, semiconductor and telecommunications. INTT has four manufacturing facilities in the U.S. and sales and service offices in seven countries. Backed by decades of technical experience and a culture of operational excellence, the company solves difficult thermal, mechanical, and electronic challenges for customers around the world, generating strong cash flow and profits.

Effective January 1, 2022 [after business reorganization as a result of the product portfolio broadening] InTEST has 3 reporting segments:

1. Electronic Test (34% of total Q3 2022 TTM sales) – semiconductor test equipment, flying probe, and in-circuit testers;
2. Environmental Technologies (27%) – thermal test, process, and storage products;
3. Process Technologies (39%) – induction heating and video imaging products.

In the 3rd quarter of 2022, INTT’s revenue grew 46% YoY to another record level of $30.8 million. Organically, revenue grew at an impressive 23% year-over-year. According to CEO Nick Grant, this was made possible by the successful implementation of the 5-Point strategy, which is as follows:

Although some of these points are not quantifiable, we can try to evaluate the success of the company’s M&A activities.

In the full year 2021, INTT acquired 3 companies – Z-Sciences (now North Sciences), Videology, and Acculogic – expanding its product portfolio in all 3 business units at once. Remarkably, it was thanks to these acquisitions that INTT managed to achieve that impressive 46% YoY sales growth rate in Q3 2022:

Our acquisitions were the main contributor to growth in the security, auto/EV, life sciences, and defense markets. And this broadening contribution is indicative of the company’s strategy to diversify and expand revenue with new customers and from new markets.

Source: INTT’s CFO Duncan Gilmour, Earnings Call Transcript

The target companies were profitable [I assume] because they had been in business for more than 20 years. As a result, INTT was able to keep its gross margin reasonably stable, although it fell by about 400 basis points during the year. The EBIT margin is down 179 bps, but the operating profit itself is up 23.93% year-on-year, so I think the process of integrating the new businesses is quite successful. This is also reflected in the growth of new orders – for some categories, we even see multiple YoY growth rates:

The increase in orders in the first nine months of 2022 as compared to the same period in 2021 reflects greater levels of demand across all our markets combined with the impact of the acquired businesses. Demand for both our front-end and back-end semi market applications has continued to show strength which we attribute to a combination of increased demand for induction heating technology solutions for silicon carbide (“SiC”) applications as well as test solutions for analog and mixed-signal applications. Strength in the automotive market reflects demand for electric vehicle (“EV”) related products. In addition to these market specific factors, we believe the overall strength in our business reflects the success of our new products and growth in our customer base.

Source: INTT’s most recent 10-Q [emphasis added by the author]

According to management’s calculations, the company’s serviceable addressable market (SAM) has grown by more than 3.5 times in the last 2 years, thanks to M&A activities and the expansion of the product range, and amounted to >$2.0B at the beginning of 2022:

And even if the company stops its extensive expansion, we will likely see a continuation of strong organic expansion due to growth in end markets.

Click to enlarge

Source: Author’s compilation

INTT’s management is seeing especially increasing demand in the silicon carbide (SIC) market, which is a priority for the company. In my opinion, this market will be able to contribute a lot of value to INTT’s development, as this market is expected to grow almost fivefold in the next 10 years, according to FACT.mr data, supported by the rapid adoption of zero-emission technologies.

Given the strong demand for its products, the company is setting fairly ambitious goals to reach a market capitalization of $200-250 million by FY 2025, representing a long-term CAGR of about 30%:

How realistic is that? It is hard to say, but I think the analysis of valuation multiples and market expectations should make this task a little easier for us.

Expectations & Valuation

INTT is a small-cap company, so coverage is limited to a couple of boutique analysts – I assume from Lake Street and Intro-act, given the attendance at the most recent earnings call. So what is priced in is not entirely reliable. This is an opportunity for the company to surprise investors by exceeding (or not reaching) expectations, of which there are generally not too many.

If we combine the historical sales and EPS numbers with what these 2 analysts see as the consensus, we immediately get a big discrepancy between the history and the forecast – how the company’s growth in the past does not correlate with what the analysts see for the future:

Likely for this reason, since December 2018, the median EPS and revenue surprises amounted to 15.53% and 2.01%, respectively, resulting in strong earnings beats that “nobody expected.”

Currently, it appears that the company is being priced as if it will only be able to meet its orders and grow at a slower rate than its end markets, which does not make sense in my opinion.

INTT is valued at less than 1 times its forward sales, which is half of the IT sector. The median P/S (TTM) ratio in the Semiconductor Equipment industry is 3.0x, so here INTT also has a comparative valuation advantage.

In general, it is surprising to see how the P/S has moved away from following the share price since the beginning of 2022:

The projected EPS figures lead to a P/E ratio (FY2023) of around 9x – even if my assumption that the company’s operational growth potential is underestimated is wrong, INTT is still quite cheap compared to its sector and industry (vs. median of 23.12x and 13.6x, respectively).

Bottom Line

A risk great enough to be mentioned is the company’s dependence on a single segment [Semi]:

Need I mention how fierce the competition is in this market?

According to research by Reports and Data, the competitive landscape of the global silicon carbide market, which INTT is most actively trying to target, is moderately fragmented, with a few major players operating on a global and regional scale. INTT’s competitors are actively evolving and the company does not have a clearly defined moat to stand out as far as I see it.

Despite the identified risks, I see fairly comfortable growth potential for INTT over the next few years – if management’s target of $200-250 million is met, we might see INTT double in the medium term (i.e., 2-3 years).

​SAM & TAM are growing like crazy, and if management is really hitting the 20% operating margin target, why does EPS only need to grow by about 1.7% QoQ over the next few years as it is now priced in now? I do not have an answer to that question no matter how unbiased I try to look at this company.

Based on the above, I, therefore, see a price target of $14.20-14.30 per share (~30%, the targeted CAGR) by the end of 2023. I rate INTT as a Buy.

Thank you for reading!