8 Stocks Flying Under Wall Street's Radar

IN 1996 GERMAN engineering giant Siemens (SI) faced grumbling investors. Having for years promised 15% returns on equity, it was delivering less than 10%. Management set out to ditch underperforming units. Among the discarded was Rofin-Sinar (RSTI), a U.S.-based maker of industrial lasers. It fetched $4.25 a share, split-adjusted, in a September 1996 Nasdaq stock offering.

Perhaps that was hasty. Rofin-Sinar today goes for $42 a share. Like Siemens, it earns a ROE of just over 14%. But Siemens' ROE relies in part on leverage provided by its debt, while Rofin-Sinar enjoys meatier margins — about 17 cents in operating profit for each dollar in sales, 10 cents more than Siemens.

Today Rofin-Sinar's lasers cut giant metal sheets and tiny gems, computer chips and solar wafers. They draw letters on keyboards and identification badges and put the edge on doctors' scalpels. They weld and surface-treat metal. The company now ships about as many lasers in a year as it did during its entire 21-year history leading up to the Siemens stock offering. With an installed base of more than 28,000 lasers, it collects a quarter of its sales from service and parts.

I recommended shares of Rofin-Sinar in this column in September 2004. They had turned up in a screen for companies with low market values relative to their free cash flow. Since then the stock has gained 191%, vs. 15% for the S&P 500 index. It recently appeared on a screen for companies with plenty of growth potential but limited analyst coverage. (Have a look at seven other screen survivors if you like or run the search yourself using SmartMoney's stock screener and the full list of criteria.)

As of its most recent quarter, Rofin-Sinar is posting record sales and has amassed a record order backlog. Soaring demand for solar cells has lifted its semiconductors laser business to 31% of sales from 23% a year ago. Even the struggling car business, which is dragging down tire and component makers, is growing for Rofin-Sinar, since car makers are keen on replacing costly welders with robotic lasers. Since three-quarters of the company's sales are made outside the U.S., the dollar's weakness has only spurred orders. Sales increased 14% in the company's most recent quarter, but rose 23% counting currency effects.

Over the past quarter Rofin-Sinar spent its net cash balance down from $91 million to $45 million, mostly by repurchasing shares. It also spent freely on research and development. Both actions tend to predict healthy stock performance. Analysts figure that over the company's next two fiscal years (starting in October) it will generate free cash of $135 million. That's enough to buy 11% of shares or start a generous dividend of, say, 2% to 3%.

The stock isn't quite as good of a deal as it was when I recommended it four years ago, but it still looks cheap. Profits are seen increasing 13% this year after taking out for charges related to a small acquisition earlier in the year, accelerating to 19% growth next year. Shares go for 18 times next fiscal year's earnings forecast, up from a forward price/earnings ratio of 16 at the time of my last story.

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