CAPScall of the Week: Rudolph Technologies

For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Rudolph Technologies (NAS: RTEC) .

What Rudolph Technologies does
Rudolph Technologies designs and manufactures process control detection systems, metrology instrumentation, and process control software systems that are used globally by microelectronic-device manufacturers.

In Rudolph Technologies' most recent quarter, the company reported a 9% rise in revenue to $56.3 million over the year-ago period, while its profit of $0.23 (excluding items) surpassed Wall Street's expectations by $0.05. For the quarter, its macro defect inspection products made up the bulk of its revenue (59%).

Whom it competes against
What makes Rudolph so unique is that its processing and defect control systems are being used by practically every major microelectronic-device manufacturer globally, but there aren't many competitors. KLA-Tencor (NAS: KLAC) is the notable big fish in the pond. It's significantly larger than Rudolph in terms of market value, yet Rudolph claims the leading market share (link opens PDF file) in back-end (i.e., inspection) macro defect inspection and front-end (i.e., metrology and software) opaque-film metrology despite that market value difference.

The biggest obstacles for both Rudolph and KLA-Tencor are the natural evolution of the smartphone and tablet tech cycles and the ebb and flow of the economy. KLA-Tencor's guidance, for example, has been weakened in recent months by a slowdown in smartphone growth and general macroeconomic uncertainty, which has lessened spending by many tech companies.

The call
After reviewing the prospects for Rudolph Technologies, I've decided to make a CAPScall of outperform on the company for a multitude of reasons.

First and foremost, Rudolph's growth strategy revolves around Apple (NAS: AAPL) and its suppliers. With Apple all but confirming the introduction of its next-generation iPhone this week, Rudolph appears poised to benefit from a surge in smartphone demand. Some of Rudolph's top customers are Qualcomm (NAS: QCOM) , which my Foolish colleague Evan Niu sees as a lock to win the baseband processor contract for the iPhone 5, and Taiwan Semiconductor (NYS: TSM) , which is speculated to have beaten out Samsung as the new processor manufacturer for the iPhone 5. In addition, Rudolph also claims Sony, OmniVision Technologies, TriQuint Semiconductor, Avago Technologies, and Toshiba as Apple supply chain customers.

Second, more than just smartphones will drive Rudolph higher. Its process control inspection and metrology equipment is used in the automotive industry -- which has experienced a revival in recent years -- and in literally anything that is wireless-capable. It also recently began developing process control systems for photovoltaic and LED manufacturers.

Finally, Rudolph's pristine balance sheet, complete with $121.2 million in net cash (nearly 40% of its current market value), makes it an attractive buyout candidate. Although it's been the one on the buying spree in recent years, snatching up both NanoPhotonics in 2012 to expand its wafer inspection capabilities and Yield Dynamics Software from MKS Instruments in 2010, I feel that Rudolph itself is an attractive takeover target. One of its customers would be wise to internalize its inspection costs and make use of Rudolph's extensive customer list.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Apple, Qualcomm, and TriQuint Semiconductor. Motley Fool newsletter services have recommended buying shares of, and creating a bull call spread position in, Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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