Electro Scientific Industries Inc. (NDAQ:ESIO) found its stock being accumulated again by Nierenberg Investment Management, who disclosed a 10.8% stake in a Schedule 13D/A filed with the SEC. Nierenberg first got involved with the company not long ago when they asked the company's board to cure the its excessive capitalization by instituting a one-time $4.00 dividend. With this request currently under consideration, the hedge fund is now presenting additional analysis reasoning that the company could be worth as much as $40 per share in three or four years.

According to the filing:

"ESIO has an additional $8 million of cash, not included in the cash and marketable securities lines of the balance sheet, $1 million from a subsequent insurance settlement and $7 million in a litigation bond in Taiwan, which increases cash per share to $7.73 ... If ESIO were to restore inventories and receivables to June 3, 2006 levels (we believe both ultimately can be reduced even more), and if we were to add the above-mentioned $8 million cash, ESIO's total cash and marketable securities would be $8.21 per share, 43.2% of ESIO's share price at the close on January 9. ESIO is profitable, cash flow positive, and it has zero debt."

The hedge fund also laid out its reasoning behind increasing its stake in the company:

1. We believe that ESIO has excellent management.
2. ESIO enjoys world leading market shares in its three major product lines, which give it the potential to earn an attractive return on equity.
3. The combination of organic growth, increased R&D investment, a number of promising new product releases, and possible acquisitions could enable ESIO to double its revenues over the next three to four years. Management has shared this goal with the public on several occasions. Given the company's business model, such growth would drive earnings per share north of $2.00, and, in our view, ESIO's share price to $40, more than double its current depressed level.
4. ESIO continues to have a fortress balance sheet, fed by free operating cash flow from profitable operations.

Many are skeptical, however, as the company's share price has dropped through 2006 from around $25 per share to settle at its current level of $19 per share. Moreover, while the hedge fund presents many valid arguments for a higher share price, much of it is contingent upon the company's ability to execute and other investors' confidence in management. However, this company is definitely one worth watching over the next few months and years as the company works to implement strategies to unlock shareholder value.

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