HOLI Stock Could Be Setting Up for a Double

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iStock.com/Ralf Geithe

HollySys Automation Technologies Stock Price Might Double

While President Donald Trump is going through with tariffs on about $50.0 billion of Chinese goods, the reality is that China is not going away, and the country has ambitious plans to become a power in technology and artificial intelligence (AI) by 2025.

An area that has tremendous potential is the automation sector, driven by the Internet of Things (IoT) and machine language. A small China-based company with strong upside is HollySys Automation Technologies Ltd (NASDAQ:HOLI).

HollySys Automation Technologies specializes in the development of proprietary automation and control technologies used in growth areas such as high-speed rail, mass transit, subways, and nuclear power.

HOLI stock is a high-prospects investment, up 9.5% this year and 41% over the past year. The potential is significant, and there are likely many more gains to come if the stock price breaks out of the sideways channel.

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Investors are likely somewhat nervous about the trade situation with China, but the fact is, HollySys Automation Technologies generates most of its revenues in China and—given the growth in automation and advanced IoT solutions—HOLI stock looks intriguing.

My Fundamental Bull Case for HOLI Stock

HollySys Automation Technologies recorded three consecutive years of revenue growth from fiscal 2014 to fiscal 2016, but reported a 21% decline to $431.9 million in fiscal 2017.

Fiscal Year

Revenue (Millions)
2013

$349.1

2014

$521.3
2015

$531.4

2016

$544.3
2017

$431.9

(Source: “FY2017 Annual Report,” HollySys Automation Technologies Ltd, September 22, 2017.)

There is some positive news, as HollySys Automation Technologies is estimated to ramp up its revenues by 21.4% to $524.2 million in fiscal 2018, followed by as much as 26.2% to a high estimate of $656.0 million in fiscal 2019. (Source: “Hollysys Automation Technologies Ltd. (HOLI),” Yahoo! Finance, last accessed June 14, 2018.)

Earnings followed revenues higher from fiscal 2014 to fiscal 2016, prior to a decline in fiscal 2017.

Fiscal Year

Diluted Earnings Per Share
2013

$0.92

2014

$1.19
2015

$1.61

2016

$1.97
2017

$1.14

(Source: Ibid.)

The earnings outlook for HOLI stock is positive, with rising earnings estimates—which is a bullish sign. Earnings are predicted to surge to $1.83 per diluted share and run up to as high as $2.31 per diluted share in fiscal 2019.

Free Cash Flow (FCF) is positive, with growth in fiscal 2014 and fiscal 2015, prior to a decline in fiscal 2016. HollySys Automation Technologies managed to nearly double its FCF in fiscal 2017.

Fiscal Year

Free Cash Flow (Millions)
2013

$21.6

2014

$74.9
2015

$79.7

2016

$38.9
2017

$66.2

(Source: “Hollysys Automation Technologies Ltd.,” MarketWatch, last accessed June 15, 2018.)

The forward growth metrics for HollySys Automation Technologies suggest a potentially higher stock price.

The forward five-year compound annual growth rate (CAGR) for earnings is an impressive 32.9%, up from 5.8% over the past five years.

HollySys Automation Technologies stock is trading at an attractive 10.6 times its high estimate for fiscal 2019.

Analyst Take

HollySys Automation Technologies stock’s price/earnings to growth (PEG) ratio of 0.40 is extremely cheap. Even if the PEG ratio jumped to 1.0, this would imply a potential stock price of $61.00 for HOLI stock.