ONTO INNOVATION INC (NYSE:ONTO): A Prime GARP Candidate with Strong Growth and Reasonable Valuation

In the search for growth stocks that do not command premium valuations, investors often turn to the Growth At Reasonable Price (GARP) strategy, which targets companies showing strong expansion metrics while keeping reasonable valuation levels. This approach avoids both overpriced growth names and deep-value traps, seeking instead those businesses that balance very good fundamental performance with accessible entry points. One method for finding such opportunities involves screening for securities with high growth ratings, good profitability and financial health scores, and valuation metrics that do not suggest excessive optimism.

ONTO INNOVATION INC (NYSE:ONTO) appears as an interesting candidate through this lens, particularly when evaluated through ChartMill's fundamental analysis framework. The semiconductor equipment manufacturer, which provides critical metrology and inspection systems for microelectronics producers, shows the characteristics that fit well with affordable growth criteria.

Growth Trajectory

The company's growth profile is especially strong, receiving an 8/10 rating in ChartMill's assessment. This score shows both historical performance and future expectations:

• Historical Growth: Revenue has grown at an impressive 26.41% average annual rate over recent years, while earnings per share have increased even faster at 36.96% annually
• Recent Performance: In the past year, revenue rose 15.51% while EPS grew 24.12%
• Future Expectations: Analysts project continued growth with EPS expected to rise 15.71% and revenue anticipated to grow 13.58% annually

This consistent growth pattern, covering past performance and future projections, gives confidence in the company's ability to continue growing its business in the semiconductor equipment sector.

Valuation Assessment

Despite its strong growth characteristics, ONTO Innovation keeps reasonable valuation metrics that justify its 6/10 valuation rating:

• Price/Earnings Ratio: At 18.55, the P/E ratio appears expensive alone but becomes attractive when compared to industry peers, cheaper than 84.82% of semiconductor equipment companies
• Industry Comparison: The semiconductor equipment industry carries an average P/E of 62.84, making ONTO's valuation notably reasonable within its sector
• Forward Metrics: The forward P/E of 17.45 compares well to both the industry average (55.54) and the S&P 500 average (22.69)
• Cash Flow Valuation: The Price/Free Cash Flow ratio indicates ONTO is cheaper than 83.04% of industry competitors

These valuation metrics suggest the market has not fully priced in the company's growth potential, creating opportunity for investors seeking affordable growth.

Profitability and Financial Health

Beyond growth and valuation, ONTO shows very good strength in profitability and financial health, critical components for sustainable growth:

• Profitability Rating: 8/10, reflecting strong margins and returns

  • Profit margin of 19.29% outperforms 84.82% of industry peers
  • Operating margin of 22.40% exceeds 81.25% of competitors
  • Return on invested capital of 10.69% ranks among industry leaders

• Financial Health Rating: 9/10, indicating very good balance sheet strength

  • No outstanding debt, providing financial flexibility
  • Current ratio of 9.59 demonstrates strong short-term liquidity
  • Quick ratio of 7.86 indicates ample ability to meet immediate obligations
  • Altman-Z score of 19.34 suggests minimal bankruptcy risk

These factors create a firm foundation that supports the company's growth initiatives while limiting financial risk, essential characteristics for affordable growth investing.

Investment Considerations

The combination of strong growth, reasonable valuation, high profitability, and very good financial health makes ONTO Innovation an interesting candidate for investors using a GARP strategy. The company operates in the semiconductor equipment sector, which benefits from long-term secular trends including increased semiconductor content across industries and the ongoing need for more advanced manufacturing equipment.

While the company shows some slowing in growth rates from historical peaks, the maintained double-digit growth expectations along with reasonable valuation multiples create an attractive risk-reward profile. The very good financial health provides downside protection, while the growth trajectory offers upside potential.

For investors interested in exploring similar affordable growth opportunities, additional screening results can be found through ChartMill's Affordable Growth screening tool, which identifies companies meeting similar criteria for growth, valuation, profitability, and financial health.

Disclaimer: This analysis is provided for informational purposes only and should not be taken as investment advice. Investors should conduct their own research and consult with a qualified financial advisor before making investment decisions. Past performance is not indicative of future results.