HollySys Automation Technologies in the Right Place for Future Growth
The United States has witnessed a massive decline in manufacturing jobs. While the worsening job count largely has to do with manufacturing shifting to lower-cost countries such as China, Asia, and Latin America, the technological advances in automation and robotics technologies are also to blame.
A small-cap automation solutions company that looks like an intriguing contrarian pick is China-based HollySys Automation Technologies Ltd (NASDAQ:HOLI), with a stock price of around $20.50 and a market cap of $1.2 billion.
The company has developed proprietary automation and control technologies and applications comprising of hardware and software. The applications are broad, including various industries, including high-speed rail, mass transit, subways, and nuclear.
In China’s massive high-speed network that encompasses over 14,000 miles, HollySys Automation Technologies is only one of two companies authorized to provide solutions to the high-speed segment at speeds of 300–350 km per hour.
In my view, HollySys Automation Technologies seems to be in the ideal space at a time when we could be witnessing a global automation revolution.
Simply take a look at the high-tech industrial and manufacturing bases in the country and you’ll notice the rapid use of automation and robotics.
Even in China, where you think assembly lines are full of people working 12-hour shifts, you are seeing a shift to automation via robotics in order to lower costs and improve efficiency.
HollySys Automation Technologies primarily operates in China, but also has a presence in South-East Asia and the Middle East.
The company has excellent prospects but needs to deliver stronger growth and metrics in order to drive up the share price.
HOLI stock is down about eight percent year-over-year, underperforming the S&P 500. For the patient risk investor, however, the stock could be ripe for some significant moves over the next few years.
The Bull Case for HOLI Stock
The revenue picture, past and forward-looking, is bullish for HollySys Automation Technologies.
Revenue ratcheted higher in three straight fiscal years from $349.0 million in FY13 to $544.0 million in FY16, but saw a disappointing decline to $431.9 million in FY17.
While the revenue contraction is a concern for HOLI stock, there is evidence that things are about to get better. Revenue growth is projected at 17.5% and 11.5% for FY18 and FY19, respectively. There is a high revenue estimate of $524.4 for FY18 and $639.0 million for FY19, which would be up 22% year-over-year.(Source: “HollySys Automation Technologies, Ltd. (HOLI): Analysts,” Yahoo Financce, last accessed September 22, 2017.)
The earnings outlook is also set to follow revenues upward, with a high estimate of $1.90 per diluted share in FY18 and $2.41 in FY19.
The company’s earnings per share (EPS) trend declined over the past 90 days, so be careful. HollySys Automation Technologies clearly has some work to do.
A big plus is the strong balance sheet for HOLI stock, with about $293.9 million in net cash. The financial flexibility will allow HollySys Automation Technologies time to get things back on track. (Source: “HollySys Automation Technologies, Ltd. (HOLI): Statistics,” Yahoo Financce, last accessed September 22, 2017.)
Flipping to the technical picture, a look at the long-term chart of HOLI stock shows upward movement, along with the rest of the market from the March 2009 bottom. The stock staged several failed attempts to hold at $25.00 in 2014 and 2015.
Chart courtesy of StockCharts.com
The daily HOLI stock chart looks more promising, with a bullish rounding bottom. We also witnessed the emergence of a bullish golden cross in August 2016 at around $17.60, when the 50-day moving average broke above the 200-day moving average.
Chart courtesy of StockCharts.com
In my opinion, if HollySys stock can hold and break above $22.00, there could be a move toward the $26.00 resistance level.
HollySys Automation Technologies trades at almost 10.9 times its FY19 EPS, which is quite reasonable, albeit the company needs to prove that it is not a value trap.
A sustained break in HOLI stock could see an eventual move to $30.00 and above, which is realistic, based on both the fundamental and technical picture.