MTS Systems Corp. $39 - Nasdaq symbol MTSC

MTS SYSTEMS CORP. $39 (Nasdaq symbol MTSC; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 17.7 million; Market cap: $690.3 million; WSSF Rating: Average) makes equipment and software that carmakers and other manufacturers use to test the mechanical behavior of materials, machines and structures. That helps them cut costs, and comply with new emission and safety regulations. In its second fiscal quarter ended March 31, 2007, MTS earned $0.56 a share, down 3.5% from $0.50 a year earlier. Revenue fell 1.1%, to $101.8 million from $102.9 million. Favorable foreign currency rates added $3.4 million to its latest quarterly sales. MTS is doing a good job expanding its overseas operations, which now account for two-thirds of its revenue. That cuts its exposure to the struggling North American automotive industry. The company is also moving away from custom-built products to standardized platforms. Using standard parts to build systems for a variety of uses will let MTS speed up production and cut its per-unit costs. Lower-priced products will also make its systems more affordable to smaller companies. MTS spends about 5% of its revenue of $21.50 a share on research, which helps it dominate its niche market. It recently sold some of its investments in smaller firms, and will probably use the cash to expand research and marketing at its core businesses. Long-term debt is just 5% of stockholders’ equity, and the company has $117.4 million or $6.64 a share in cash. That gives it plenty of room to make acquisitions or expand its current operations. The company may also use the cash for a special dividend; the regular dividend of $0.44 yields 1.1%. MTS’s stock got as high as $48 in May 2006, but fell on concerns that weaker new car sales would cut demand from automakers. But growing sales to aerospace and other industrial firms should offset this. It now trades at 17.6 times the $2.21 a share that MTS will probably earn in fiscal 2007. MTS Systems is a buy.