January 23, 2012 PSW Staff
playing an increasingly dominant role, one that can determine in the blink of an eye a products disposition as a
trend setter or follower. With a market cap of just $31 million, inTest Corp. (INTT) is a very small company with a
relatively large market share in the semiconductor test equipment arena with big sales to well-known names like
Teradyne (TER), Cyprus Semiconductor (CYY), Analog Devices (ADI) and Texas Instruments (TXN).
During the last cyclical downturn, this company was forced to downsize, cut salaries and diversify starting in
2007. Two specific successes with this strategy have helped the company see its best couple of years in over a
decade, and may be the impetus for dramatic earnings growth going forward.
Margin improvement: Through the cost cutting initiatives, inTest has improved both gross and operating
margins. Gross margins climbed from 42% in 2006 to 47% for the past year, and operating margin’s grew from
5% to 15% during the same time period.
Diversification: The company began growing its non-semiconductor test equipment division by leaps and
bounds to more than make up for softening revenues elsewhere. This includes products for the Automotive,
Aerospace, Defense, Telecom and Pharmaceutical industries. This segment grew from 18% of its business to
41% during the first nine months of 2011 and 60% during the third quarter. The company expects the non-
semiconductor business to grow to $100 million in revenues, which would be twice the entire company's current
Meanwhile, thermal products provided the growth needed for this company to post earnings per share of 72 cents
in 2010 and more than 60 cents (excluding a positive one time item in the third quarter) so far in the first nine
months of 2011, both more than doubling its last positive earnings year which was in 2006. A recent acquisition
of Thermonics, Inc., will help grow this segment even further and faster.
Although the company has already started what appears to be a dramatic turn around, some softening has again
occurred during the last reported quarter, and within the company's fourth quarter guidance. Despite a good bit of
evidence that this softening will be short-lived, Wall Street has yet to find any value in the stock.
At around $3.00 per share, which is up from the low of $2.13 seen late last year, the stock trades at just 3 times
trailing twelve month earnings. Should revenue and earnings be similar in 2012, which may be a worst case
scenario, and grow by just 15% per year for the foreseeable future, we have a very conservative forward P/E of 3
and even more conservative PEG of 0.27. The industry itself is expected to grow by 26% per year for the next five
years and has an average P/E of 13.5.
With the fat trimming this company has done over the last few years its financial position is as strong as it has
ever been. Shares outstanding went from 8.32 million back in 2002 to 10.19 million now while its long-term debt
shrank to zero. Retained earnings for this company have gone from $17.8 million in the red at the end of 2009 to
$10.5 million in the red at the end of 2010. Stockholder equity climbed from $8.6 million in 2009 to $16 million in
2010. For the first nine months of 2011, retained losses have shrank from that $10.5 figure to just $1.5 million
while stockholder equity grew to $25.4 million.
The company has been adding to its coffers as well, almost doubling its cash position in the last nine months to
$12 million. The company was able to pay $3.8 million in cash for its recent Thermonics acquisition allowing
them to grow while remaining debt free. InTest has said that some of the cost cutting initiatives including the
slashing of some specific salaries were and are still meant to be temporary. The strengthening of its financial
position should alleviate any concerns surrounding this issue.
Although plenty of liquidity exists for this stock, it sees fairly light volume and given its size, is quite under-followed
with only one major analyst covering it. In fact, if the stock were to double overnight and the P/E became 6, it is
unclear as to who would even notice. Fourth quarter and year end 2012 results are due out in March and with the
stock where it is, and guidance from the company being conservative, the bar is set extremely low. Keep in mind
that the conservative guidance still calls for 2011 being a better year than the record-breaking 2010. The strategy
seems to have already been proven extremely effective and Wall Street may soon be forced to agree.