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Rubicon Technology (RBCN): The 64% Question

 April 09, 2013 09:50 AM

(By Rich Bieglmeier) If you are like most investors, the idea of 64% upside, well, let's just say it catches your attention – no? Heck, if it was a sure thing, it's time to mortgage the house mama and let ‘er rip. Obviously, nothing in the stock market is certain, except for uncertainty. 

Nonetheless, Sterne Agee's upgrade of Rubicon Technology (RBCN) from a "neutral" rating to a "buy" rating, along with a $12 price target, 64% potential upside coincidentally, certainly captures one's attention. Who isn't interested in the possibility of turning $1 into $1.64 hundreds, if not 1,000s of times? 

Sterne Agee analyst Andrew Huang says that business conditions are on the improve for the sapphire crystal maker, used primarily in LED, HD-DVD and Blu-ray products. Huang also thinks that Rubicon will get a boost from higher prices, and "several new smartphones coming out in the second half of this year [that] will include sapphire camera lenses." 

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Let's see what it would take for RBCN to hit $12 based on Wall Street's current sales and earnings-per-share estimates. 

We have to go to 2014's earnings estimate as the company is forecasted to lose 26 cents in 2013. The street thinks profitability is in store for 2014 with $0.09 per share. That means investors will need to value Rubicon with a Megatron like price-to-earnings ratio of 133.33. That's a tall order; not impossible, but well above regular cruising altitude. The specialized semiconductor did trade with a satellite P/E from March of 2010 through September of '10. 

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During that very limited window, shares exchanged hands with an average P//E of 253, maxing out at 316 and bottoming out at 199. High altitudes can lead to light headedness, but the moral of the story is that Rubicon's P/E is capable of reaching orbit altitudes. However, iStock wouldn't feel too safe way up there. These sorts of stocks don't come with parachutes.

We might be willing to pay two times the growth rate. Since earnings are starting below sea level, we'll have to turn to sales. Analysts peg 48.30% revenue growth for RBCN in 2014 versus 2013's expected decline of 16.10%. At two times 48.30, a P/E of 96.6 is the absolute maximum height we'd be willing to travel, or $8.70 per share. 

Speaking of 2014 sales, that's the number we'll use for our price-to-sales (P/S) review. Analysts target 83.64M for next year. In the last five years, RBCN's P/S chart looks like the Rocky Mountains, smaller ranges to the west and the plains to the east. 

Shares traded for as little as 1.17 times sales in 2008 and as high as 29.26 times sales in 2009 with an average of 7.16. Now that's a range that would turn Andrea Bocelli green with envy (would you be willing to trade your sight if you could sing like that? I'm not sure I wouldn't take that trade. That dude's voice is moving.) 

Now, iStock might be comfortable with a company trading at two, maybe three times sales with RBCN's projected 2014 growth rate. To hit $12, RBCN needs to trade at 3.24 times sales sometime between here and the end of 2014. Still a little outside of iStock's comfort zone, but less than peers that trade with P/S ratios of four or more. 

Overall: Rubicon Technology's (RBCN) history suggests that the stock has a chance to hit Sterne Agee's $12 target, but we wouldn't bet the house on it, mama would be mad. And if mama ain't happy…



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