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Photonics makers call in the robots
Adept Technologies looks well positioned for automating the handiwork of fiber-optics components makers. Also: Why Plug Power still looks electric.
By Jon D. Markman
Robots are so ingrained in our imagination as agents of the future that it?s a little disconcerting to see their positions in the 21st century so far are little more exotic than two-ton automotive assembly workers.
Some investors are betting that their industrial obscurity is about to end, however, amid the trends toward miniaturization and faster product cycles, as well as the boom in fiber-optic manufacturing.
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Currently most of the world?s fiber-optic components, for instance, are hand-assembled on factory floors that look like antiseptic sweatshops. Check out the construction of WDM Couplers at a JDS Uniphase (JDSU, news, msgs) plant in Canada and you?ll see hundreds of gowned workers peering through microscopes as they tweeze tiny strands of glass into place. The company aches to automate the process, but product requirements change so fast that most of today?s giant, fixed-in-place robots would quickly end up as pricey paperweights.
One company that seems to have a shot at taking this fast-growing industry into the promised land of hands-off manufacturing is Adept Technologies (ADTK, news, msgs), the nation?s largest maker of industrial robots. According to Peter Conrad, senior research analyst at Kopp Investment Advisors (the firm?s largest shareholder), Adept first angled into this space awhile back by selling robots to Lucent Technologies (LU, news, msgs) for ?macro-positioning? of big photonic components. Following its recently completed acquisition of Arizona-based robotics concern Pensar Tucson, however, Adept is expected to focus its considerable expertise on the ?micro-positioning? field, in which design specs call for lining up flexible objects at high speed within two microns of variability. It?s like threading a human hair through the eye of a needle at 60 mph.
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The firm accelerated in that direction on Monday with the announcement of a deal to provide its SCARA and Cartesian robots to Corning (GLW, news, msgs) for photonics assembly lines. Yet even if this new part of its business takes longer than expected to fully materialize, Adept could well be a friendly haven for shell-shocked tech investors over the next year or two. Sporting a rather small market capitalization of $152 million, the company is on track to grow 20%-plus annually and is insulating itself from the capital-equipment cycles of individual products by diversifying across the industrial spectrum. In other words, even in the unlikely event that the world?s automotive, semiconductor, pharmaceutical and fiber-optic factories all slow down at once, Adept robots will still be on call at Pepperidge Farms to handle the alignment of the Milano cookie.
Share price could double in a year
On the valuation side of the ledger, Adept has hit an annual run rate of $100 million in revenues and is cash-flow positive. Earnings have been a little uneven, but Conrad believes the component shortages that have tripped up the firm in a couple of past quarters are waning. Trading at a remarkably low price-to-sales ratio of 1.6 -- about a fourth of its competitors -- Conrad believes it?s fair to suggest that Adept shares could double in price over the next 12 months. And considering he?s one of the researchers who led Kopp to buy 25% of laser-component manufacturer SDL (SDLI, news, msgs) well before its 3,000% rise in the past two years, even a dumb robot would recognize that?s an estimate worth paying attention to. Currently the stock looks overbought, so if tech stocks tank again, you might well get a chance to buy again around $9-$13.
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How big could this get? Fiber-optic manufacturing is miles behind the semiconductor-manufacturing businesses when it comes to automation, and the assembly requirements are tougher. Chip-assembly robots made by two firms that are 10 times the size of Adept -- Asyst Technologies (ASYT, news, msgs) and PRI Automation (PRIA, news, msgs) -- basically just move wafers in and out of cassettes in constrained patterns. Photonic robots require a great deal more flexibility and precision. ?We believe that the current Web infrastructure cannot continue to expand at its current rate without fiber-optic technology, and we think we are the best equipped to meet that industry?s manufacturing demand,? said Joseph E. Campbell, vice president at Adept.
Following the filings
I first came upon this idea by rooting around FreeEDGAR.com for Kopp?s recent trading activity -- one of my favorite non-mechanical ways of finding stock ideas. It?s easy to do: Just visit the site?s home page, type the name of a hedge fund, mutual fund or individual investor into the ?Company Name? search box, and click Enter. Click ?View Filings? on the succeeding page, then look at a fund?s Form 13D and 13G reports to learn the names of companies in which it is taking positions amounting to 5% or more. View the fund?s 13F-HR report to see all of its holdings in the most recent quarter.
In addition to Kopp, some of the funds I research regularly are Driehaus Capital, Nevis Capital, Zweig Dimenna Partners and Essex Investment Management. Some funds list all of the trades that they have made in a stock over the most recent period in their 13Gs. The following table lists all the trades that Kopp -- manager of about $7 billion in private and institutional funds -- made in Adept since February; it?s been in the stock since 1998.
Kopp Trading Diary
Purchases of ADEPT since February
Date Shares Avg. Price
4/27/2000 BUY 61,800 $11.50
4/26/2000 BUY 27,200 $11.53
4/25/2000 BUY 5,500 $10.44
4/20/2000 BUY 35,100 $11.00
4/19/2000 BUY 15,000 $11.00
4/18/2000 BUY 2,000 $10.85
4/17/2000 BUY 2,500 $10.00
4/13/2000 BUY 26,000 $11.00
4/12/2000 BUY 14,800 $11.00
4/11/2000 BUY 4,500 $10.92
4/10/2000 BUY 27,000 $11.75
All March BUY 325,120 $13.34
All February BUY 50,000 $10.60
Total 596,520.00
Pluggin? away
Plug Power (PLUG, news, msgs), one of the founding members of my 100x10y portfolio, surprised investors last week with the announcement that its distribution partner, General Electric (GE, news, msgs), appeared to be backing away from its commitment to purchase its first round of pilot units. General Electric quickly declared that its relationship with Plug was intact, noting in a published statement that it was simply stretching out the time over which it would buy them by six months.
It?s hard to understand exactly what?s going on in their relationship, though it still seems solid. But more importantly I think Plug, and the distributed-power story overall, are still valid. Forget for a moment about Plug?s stock price, which jolted to $156 in January and has since settled back to more reasonable levels. Focus instead on the reason I proposed Plug in the first place: The success of its products, once they move into mass production, seems inevitable -- at least through my rose-colored glasses.
Why? The developed world?s power grid hasn?t really been upgraded since it started coming online in the early part of this century. Merrill Lynch analyst Sam Brothwell pointed out in an interview Monday that the electricity industry -- facing vastly greater demands for stable bandwidth -- will ultimately have to face the equivalent of the telephone industry?s upgrade from copper-based communications to fiber optics. And because no urban communities today will stand for the construction of new coal-, nuclear- or oil-fired power plants, a widespread move to alternative, environmentally friendly, distributed energy sources like residential and commercial fuel cells is all but certain. (Think about this next summer when your utility asks you to cut back on air conditioning during a heat wave.)
Enlightened utilities will probably install these compact units in your home or business for free or a small fee -- and when you?re not using yours, the utility could potentially route its power over the grid to other neighborhoods far away. If that occurs, Plug could become the Nokia (NOK, news, msgs) or Dell Computer (DELL, news, msgs) of that business -- selling a relatively inexpensive, mass-market item that fulfills a key modern need. The electric power business in America is worth about $210 billion annually today. Plug doesn?t need much more than a fraction of that to be successful.
Where does that leave the valuation of the stock today? Beats me, since until real commercial revenues begin, you?re acting more like a venture capitalist than a conventional investor. Make no mistake: This is the very definition of a story stock. It is very high risk. But I still believe patient investors stand a chance to see appreciation of at least 10 times over the next 10 years if current expectations materialize. To make a somewhat safer bet on the concept, consider United Technologies (UTX, news, msgs), whose International Fuel Cells unit makes commercial fuel cells today; or Dupont (DD, news, msgs) and 3M (MMM, news, msgs), which make key membrane components; or Stillwater Mining (SWC, news, msgs), which supplies platinum for the fuel stack.
Fine print
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Some readers expressed amusement when I exposed my secret life as a closet value investor last week. But it?s really all about just staying flexible, and using screening techniques to find what works in any market -- even today?s. The two tech names I highlighted in the past two weeks -- Keithley Instruments (KEI, news, msgs) and Three-Five Systems (TFS, news, msgs) -- are up 30% and 27% through May 8. I'm almost ashamed to say this, but Keithley even pays a dividend. It announced a split on Monday. At the moment, though, the move in both stocks looks finished... To learn more about United Technologies? fuel cell subsidiary, which has supplied NASA for 40 years, visit its Web site.... To learn how Stillwater Mining extracts platinum in Montana, click here.... To see R2D2?s more practical brethren at Adept Technologies, see its Web site?. So far having no luck at all in our HiMARQ portfolio: QLogic (QLGC, news, msgs) got clobbered Monday for announcing plans to buy a rival fiber-optic switch maker, and Solectron (SLR, news, msgs) got smashed the prior week for pre-announcing a slow quarter. Only ImClone Systems (IMCL, news, msgs) and Tollgrade Communications (TLGD, news, msgs) remain in positive territory. It?s been a humbling year so far for seasonal analysis.
At the time of publication, Jon Markman owned or controlled shares in the following equities named in this column or listed in the SuperModels portfolios: BroadVision, Cisco Systems, Digital Lightwave, Emulex, Kopin, Maxygen, Microsoft, Nokia, Nortel, Oracle, Qualcomm, SDL, Siebel Systems, Sun Microsystems, Superconductor Technologies and Xcelera.com.
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