SAN FRANCISCO -- Keithley Instruments (KEI) is one of those companies most of the Street missed, and no wonder. To have picked up shares of the Cleveland-based maker of equipment for chip and telecommunications production, you would have had to trip over it.
No investment bank covers the company. It isn't exactly sexy. A one-time maker of hearing aids and devices that track submarine torpedoes, for most of the past decade Keithley has made equipment largely for military and university research labs, with a market capitalization that hovered around $60 million. "It hasn't been one of the most dynamic companies around," says one industry consultant, acknowledging he hadn't given Keithley much of a tumble.
But since the first of the year, shares of Keithley have risen from 20 3/8 to 32 15/16, a jump of 60%. That gives Keithley a six-month gain of 300% -- nice even compared with the 55% gain in the
Nasdaq Composite Index
over the same period. What has spurred the rise? Investor enthusiasm for stocks even tangentially related to wireless communications. Another factor:
spinoff of a unit that dominates Keithley's market.
A rise in the stock of a company with the words "chips" and "telecommunications" in its description should be no shock. Both sectors have seen an investor frenzy. Stocks of chip-equipment maker
and wireless phonemaker
trade at 95 times and 110 times 12 month trailing earnings, respectively.
Keithley seems to straddle both sectors. But until this summer, industry watchers largely ignored the company.
The first jump in the stock came after Keithley announced July 20 third-quarter earnings of $2.4 million on sales of $25.9 million -- a year-over-year quadrupling of net income and an increase of 15% in sales. Moreover, new orders were up 43% year over year.
It seemed to garner more attention in the days leading up to Nov. 18, the day HP spun off to the public market its equipment division,
, which is Keithley's only major competitor. Some 45 million shares of Agilent traded that day. Investors enthused about Agilent started noticing Keithley. From Nov. 8 to Nov. 18, an average of 120 million shares of Keithley traded hands each day, eight times the average daily volume of the previous 10 days.
Compared to Agilent, Keithley seems a bargain. "Agilent is trading at 50 times trailing earnings," says Philip Robert, micro-cap portfolio manager for Florida-based investment adviser
DePrince Race & Zollo
, who has owned Keithley shares for two years. "Keithley is a little baby Agilent, but it trades at a ridiculously low multiple. They are too small to show up on a lot of people's radar screens. It doesn't do a lot of M&A activity so it won't generate the fees that a small brokerage firm needs."
A small company like Keithley doesn't pose much competition for one as big as Agilent, which has revenue of nearly $8 billion, Robert says. But small market-share gains for Keithley will add considerably to its revenue and earnings, and there is always room in any market for a second supplier.
Until around November, Robert was one of the few who had noticed that over the past five years, Keithley had changed. It had quietly dumped slow-growing products, de-emphasized its lab business and turned to cultivating corporate customers in telecommunications, first Motorola, then
"In 1994 we decided that the research community wouldn't grow very much and the military aerospace group was decidedly spending less money because of the end of the Cold War," says CEO Joe Keithley, son of founder Joe Keithley. In 1998, the company sold off two divisions that made chemical- and radiation-measurement devices in 1998. As a result, overall sales for the next year lagged, but income rose. Over the past four quarters, Keithley's net income has risen 96% year over year, while sales rose just 7%.
One product in particular took off: A machine that simulates a cell phone battery so a company like Nokia can test how the phones work when the battery wears down. Ray Rund, an analyst at Cleveland-based hedge fund
, said it was this product that attracted him to the stock in November. It seemed just the type of bargain the fund was looking for: 18 months before, it had picked up shares of little-known
RF Micro Devices
, which made chips for wireless phones, before its subsequent 2,000% rise.
The question now for value funds like Shaker and DePrince Race is how much higher a small-cap stock like Keithley can rise. The stock is now trading at just 25 times trailing earnings, which suggests it has room to grow. Meanwhile, the chip-equipment market is in the middle of a three-to-five-year growth cycle and the worldwide appetite for new wireless phones seems irrepressible.
"We always sell when the momentum-stock guys get involved," says Robert of DePrince Race. "But I'm never one to top-tick any stock."