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Kulicke and Soffa Industries: Patience Will Pay Off (NASDAQ:KLIC)

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Kulicke and Soffa Industries (NASDAQ:NASDAQ: KLIC) is a semiconductor equipment manufacturer, founded in 1951. The stock has historically outperformed the S&P500 index, indicating strong business performance in good times and bad. Accompanied by increasing dividends and huge buyouts, this rather unknown company can continue to grow into the next decade. In addition, the company has positioned itself at the forefront of the automotive, industrial and advanced display industry. The risk-reward balance weighs heavily on the reward side, making KLIC a consideration for your portfolio.

Return of KLIC prices vs S&P500

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Company presentation

Kulicke And Soffa Industries designs, manufactures and sells capital goods and tools used to assemble semiconductor devices. The company also services, maintains, repairs and upgrades its equipment, and sells consumable spare tools for its equipment and for equipment from peer companies. The Company’s customers include semiconductor device manufacturers, embedded device manufacturer IDMs, outsourced OSAT semiconductor assembly and test providers, and automotive electronics suppliers.

Industry growth in favor of KLIC

Smart devices are more popular than ever, creating a growing demand for chips. The global semiconductor industry is on track to reach a market value of over $1 trillion by 2030, according to an expert from McKinsey & Company. The automotive electronics section is expected to be the main driver of growth with a compound annual growth rate of 13%. The industrial electronics section comes second with a CAGR of 9%.

Global Semiconductor Market Value Forecast

McKinsey & Company

The various markets served by KLIC can be found in the latest SEC Quarterly Fill (10-Q). General Semiconductor is their core business, which has grown 26% in the last 6 months compared to a year ago. Moreover, the automotive and industrial segment has seen positive momentum lately, as evidenced by the 68% revenue growth in the last 6 months compared to a year ago. This segment is well positioned to benefit from further growth over the next decade. Although the memory business represents only 10% of total capital goods revenueit is growing at the fastest speed and definitely worth watching.

Markets served by KLIC

T2 Investor Relations

The second quarter shows an improvement in profitability

KLIC beat earnings and revenue estimates in its latest quarter as global challenges limit industry growth. Additionally, the management team is confident in its business and has repurchased nearly 3 million shares (worth $146 million).

The company reported revenue of $384 million and net income of $116 million, representing a 13% year-over-year growth rate on a revenue basis. However, the 62% year-over-year net income growth is far more remarkable. The company has increased its profitability and efficiency by a large margin. Earnings per share increased even more than net income due to buybacks. Fewer shares outstanding translate to more earnings per share.

Overview Q2

T2 Investor Relations

Comparing the results with those of the last quarter, a drop in revenue can be seen in the table. Even so, the business still proves profitable by increasing gross margins and operating margins.

Cheapest in the industry, despite growth to come

A low valuation for a good company has a positive impact on the risk-reward balance. Historically, the stock is trading at a 10-year low. Some would say that the semiconductor industry is cyclical and the peak of profitability is near. In this case, it is important to understand that profitability could decline. Therefore, these measurements could be misleading.. Nevertheless, there is a gradual growth in the demand for chips caused by impactful technology transitions.

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Data by YCharts

In the chart below, I have compared KLIC competitors and other peers in terms of PE and EV to EBITDA ratio. The two companies that stand out the most are Micron Technology (MU) and Kulicke And Soffa Industries. Both are trading well below the industry average and appear to be overlooked by investors. An EV/EBITDA ratio below 10 is generally interpreted as healthy.

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Data by YCharts

Moreover, KLIC’s outlook in terms of price/earnings/growth ratio is superior to that of the others on the list. Take these numbers with a grain of salt, as PEG focuses on analyst estimates.

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Data by YCharts

Short interest could be the culprit for the lower valuation relative to the industry. Short-term interest has increased along with the price level, which may slow the move to new highs for the time being. On the other hand, this may be an opportunity to build a position as the price trades sideways.

Chart
Data by YCharts

A rock-solid track record unlocks a massive amount of buybacks

KLIC ended the quarter with nearly $700 million in cash and cash equivalents, representing 26% of its current market capitalization. The business is stuffed with cash, this allows reinvestment in the business, paying down debt, paying dividends and making buyouts. Since the company has no debt, it can focus entirely on others. Thus, KLIC repurchased 2.9 million shares worth approximately $146 million in the second quarter, equivalent to 5.4% of shareholder value. The company has $340 million to make buybacks under its current buyback program, representing another 12.8% of the value. The management team has decided to make more and more buybacks because they believe that the stock is currently undervalued. Therefore, it is certain that they will execute the buyback program opportunistically.

Q2 balance sheet

T2 Investor Relations

Research and development is the key to growth

The company uses outsourced parts in the manufacture of its equipment, allowing it to minimize fixed costs and capital expenditures. Therefore, research and development expenditures are needed to keep up with technological innovation. The company takes a more conservative approach to R&D spending. There’s no aggressive spending in boom times and no underspending in dark times, resulting in more financial leeway when the tides turn.

R&D costs

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Risks

Short sellers encourage a cyclical downtrend, leading the stock to more exposed to downside risk. Even so, the stock has been in a long-term uptrend since 1982. In a cyclical downtrend, net profit margins could fall back to the 5-year average of 11.63%. Either way, it would still outperform the industry median right now. Moreover, KLIC’s product line has improved over the past 5 years due to the demand for more advanced technologies (5G, EV, micro led display).

The profitability of KLIC

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Another risk to keep in mind is the geographic concentration of KLIC’s customer base. About 55% of their revenue in 2021 came from shipments to customers located in China. Although the high concentration of sales in China could be a risk, it could also be an opportunity. China is lagging behind in semiconductors and trying to catch up at a rapid pace. This can break the cyclical cycle and allow the business to benefit from higher margins for a little longer.

Carry

Kulicke And Soffa Industries is well positioned for the future with a proven track record supporting its business performance. The stock is a great choice for value investors who like to cram in bad (misleading) sentiment. Additionally, the company is grossly undervalued relative to its peers and has the balance sheet to survive a cyclical downtrend. For these reasons, I give Kulicke And Soffa Industries a Buy rating.