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Topic: Growth Stocks

MTS Systems Corp. $34 – Nasdaq symbol MTSC

MTS SYSTEMS CORP. $34 (Nasdaq symbol MTSC; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) makes equipment that manufacturers use to test the mechanical behavior of materials, machines and structures.

In its third fiscal quarter ended July 1, 2006, earnings from continuing operations fell 6.3%, to $0.45 a share (total $8.5 million) from $0.48 a share ($9.9 million) a year earlier. Sales grew 1.3%, to $95.9 million from $94.7 million.

Although MTS sold more equipment, it received fewer orders for custom-made equipment, which generate higher profits for it than its regular products.

MTS spent $4.8 million (5.0% of revenue) on research in the latest quarter, up 43.3% from $3.35 million (3.5% of revenue) a year earlier.

One area that MTS hopes will spur its future growth is nanotechnology, which is the science of manipulating materials on a molecular scale.

Although nanotechnology accounts for just 2% of its total revenue, its use is spreading. Some customers may prefer to buy this new equipment from a supplier they are familiar with like MTS, instead taking on a new supplier.

The stock has moved down from the $48 peak it hit in May. It now trades at 18.1 times its forecast earnings of $1.88 a share. The $0.40 dividend yields 1.2%.

MTS gets about half of its revenue from the American automotive industry, and investors fear that slowing car sales will force carmakers to cut spending on new testing equipment. But MTS’s products and services pay for themselves many times over, which offsets this risk. Rising sales to overseas manufacturers also cut MTS’s risk.

MTS has $115.3 million ($6.35 a share) in cash, and just $14.5 million in long-term debt (9% of equity), so it can easily survive any short-term slowdown.

MTS Systems is a buy.

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