FEI Company: Investing in Electron Microscopes

At the Georgetown Stock Competition this weekend, David Paolella and I pitched a specialized transmission electron microscope company, FEI Co. We unfortunately did not make it out of the first round. We were knocked off by the winning group from UC Berkley (pitched long DMND). In this post I write about the Natural Resource segment of FEI Co. which is a a huge catalyst. Specifically I will address how the company is trying to analyze where they add VALUE to natural resource exploration.

FEI Company is the leading electron microscope manufacturer in the world. It has four major business segments. Academic Research, Electronics (Semiconductors, chips), Life Sciences, and Natural Resources. The company's stock (Nasdaq: FEIC) is nearing 52-week highs and is garnering new attention from life science analysts at JPMorgan and Bank of America. The company expects revenue for the first quarter of 2012 to come in line with analysts expectations of $0.6-0.68 EPS .

In class we've spoken about where a company adds value with their products or services. Currently, FEI is in the process of such a process. Their new natural resource products, QEMSCAN WellSite, will better help natural gas and oil explorers. It implements new Core-to-Pore nanoscale analysis of earth materials gathered from drill sites to advise natural resource drillers the best way to drill, frack, or split the earth.

Last Monday, I spoke with the Treasurer and Investor Relations Executive, Mr. Fletcher Chamberlin, about the infancy of their product and further numbers. The three QEMSCAN WellSite test sites in the Persian Gulf, Papau New Guinea, and Italy all concluded with very positive results. They partnered with GEOLOG, Haliburton, and Maersk Oil for these sites and are trying to tweak and price the product so that it yields larger gross margins. While the Treasurer could not publicly release specific numbers or margins of the Natural Resource segment yet, he said that the margins are greater than their Electronics Segments (52.8%). The executive was really excited about the 2012 commercialization of the QEMSCAN WellSite, and the opportunity to continue to grow their Natural Resource segment at a larger multiple than lasts years growth (>200%).

The exploration of oil and natural gas is a $359 Billion dollar industry. New partnerships with GEOLOG, Haliburton, and Maersk Oil will allow FEI to contact the majority of natural resource customers. This will help FEI sell their rugged Microscope and software in shorter time span.

FEI's inventory historically mirrored revenue, but now we are seeing that FEI has greatly increased their raw materials relative to their other inventory of Finished Goods and Work In Progress. My team's investment thesis was that these new raw materials were purchased in order to build their new Natural Resource Electron Microscopes. It seems to be that management has seized the opportunity to add value to Natural Resource explorers by reducing the amount of time and capital expenditure it takes to pump, mine, or drill resources out of the earth.

FEI's new Natural Resource segment is something to keep a major eye on as the company sees it's share of Revenue to grow from 3% to 26% of company revenue by 2014.