ACLS is a manufacturer of ion implanters, which are used in the manufacturing of semiconductors.  Market share in this niche was historically relatively evenly divided primarily between ACLS, Applied Materials (AMAT), and Varian Semiconductor (VSEA).  Almost 10 years ago, the industry went through a technology transition in which VSEA emerged as the technology leader.  As a result, AXLS lost a significant amount of market share and AMAT actually decided to exit the business until they recently decided to buy VSEA in order to reenter.  Varian has 80%+ share of the market while ACLS has about 12% share.  I believe risk/reward is asymetric given valuation (pro forma for a sale lease back which will be completed by early 2012, the stock is trading close to net cash and at a signficant discount to net working capital less debt) and you have optionality for a very outsized return if ACLS can gain share back.  There are several reasons to believe that ACLS will be successful in doing so.  Here are the highlights:

1) The company will be doing a sale lease-back on its real-estate, which will result in at least $50m of cash - significantly more than the real-estate value the company is holding on it's balance sheet.  When combined with the net cash currently on the balance sheet, the company will have over 87c per share of net cash.  Furthermore, current assets less all liabilities will be close to $2 per share so there is a signifcant margin of safety. The company generated positive 6.6m of free cash flow in q3 and is expected to slightly burn some cash in q4.
2) The company has been gaining back market share.  ACLS kept R&D relatively high (it was 15% of sales last Q and was up 15% y/y in absolute dollars even though sales were down y/y).  As a result, it has caught up technicolically.  ACLS likely gained a couple points of share in 2010 and is arguably at a point where downside to market share is very limited because some customers just want to keep another player around.  Finally, AMAT has mismanaged several prior acquisitions and it is possible that VSEA loses focus now that it is part of a much bigger organization. While VSEA has been known as the semi equipment company that offers the best customer service, AMAT is known for poor service.  VSEA management was considered to be very good and I wouldn't be surprised if they sold when they did because they were worried about their market share topping out.  I also woundn't be surprised if the top management of Varian eventually leave AMAT for better opportunities at more dynamic/less bureaucratic companies.  
3) If ACLS can continue to gain back market share, the upside can be tremendous since the business has very high operating leverage.  Operating expenses should be relatively flat in absolute dollar even if sales double. Note that VSEA was acquired by AMAT for close to $5 billion compared to ACLS' current market cap of $125m, which as I stated earlier was mostly cash.  
4) ACLS may be an attractive M&A target for several semi equipment companies that like AMAT are trying to expand their footprint within their customers fabs.  The increased footprint can bring about more service revenue opportunities. An acquitision would also potentially accelerate share gains for ACLS since one of the reasons customers shy away from ACLS is because of its small size.  
5) The increased cash from the sale lease back will likely help with getting new customers since ACLS will have close to $100m of cash and customers will be less worried about taking a chance with the company.
6) Gross margins have been steadily improving over the past several quarters.  Unlike most companies in the industry whose gross margins fluctuate with sales, ACLS' product gross margins increased 4 points y/y last Q even though sales declined due to the cyclical downturn for the industry.
7) The industry will be going through another major technology transition within the next 3-5 years.  This will give ACLS the opportunity to leapfrog AMAT in the same way that VSEA leapfrogged both AMAT and ACLS in the last transition.  Unlike AMAT, ACLS is entirely focused on this industry niche and is determined to not make the same mistake twice.  cxl

8) High barriers to entry.  Note that AMAT used to be in the industry and chose to pay close to $5b to re-enter.  ACLS has invested in 46 field offices across 12 countries to service customers.  ACLS also has close to 500 patents and over 500 patents pending. 

9) The company is a forgotten name.  There were only a few people who bothered to ask a question on the last earnings call.

I am not sure how to think about a target valuation for this stock.  It is clear that downside is very limited given the balance sheet and if market share and gross margins continue to keep moving in the right direction, there are some very large upside possibilities.  Note that the stock was over $15 in 2002 which was another very bad time for the industry and was above $3.5 even in January this year.  For now, I am going to use $2.50 as a target, which is just slightly over book value but I plan to reevaluate this as time goes on and after I get a better understanding for where market share can go to.   

Issues:
The semi equipment industry is highly cyclical and it appears to be curently in a downturn.  If the downturn is deeper than expected (the industry is  ultimately correlated with the economy) then the company will likely burn some of its cash buffer.  The company is expecting to burn a small amount of cash in q4.  Finally, since the company is primarily competing with applied materials, it needs to show long term viability to it's prospective customers and is thereby unlikely to give back it's excess cash to shareholders as long as it remains an independent company.

The company will close on it's sale leaseback by early next year after which I expect it to screen much better and attract new investors.  There have also been signs that the semi equipment industry may be starting an up cycle.  Asml, which has the highest visibility in the industry due to its long lead times, recently alluded to better visibility. Finally, ACLS will likely continue to post market share gains and margin improvement.  An announcement of a high profile order by a large semiconductor company such as Intel that historically has not been a meaningful customer would increase the market's confidence in the company.