Buy Recommendation / 2014-2015 Price Target: $17 / Upside: 30%
P/E 10X / Market cap: $1 bln / Cash: $508 mln / Debt: None
When I ran 280 names through my 155-variable computer model in early September, three ideas were generated; Broadcom Corporation (BRCM) and Kulicke & Soffa (KLIC). I went out with BRCM and initiated that on September 10. While I was preparing the report I was looking at the semi-conductor equipment name KLIC. That was the highest ranking name in the industry in the 280-name report. KLIC is + 15% since my September 30 recommendation and still has 30% upside. It is not often we see a company with $1 bln market capitalization with $500 mln and no debt!
It is hard to take this cash completely into consideration, but it is hard to ignore. KLIC does not pay a dividend and does not repurchase shares. The wild card here is if a shareholder activist steps in. If that does not happen - I do not recommend names on speculation alone - KLIC may end up making a dilutive acquisition and the cash may turn out to be a near-term negative.
Kulicke & Soffa reported Q3 (June) on July 30. GAAP earnings were $0.25 per share, $0.11 better than the GAAP Capital IQ Consensus Estimate of $0.14; revenues fell 44.7% y/y to $141 mln versus the $127 mln consensus. KLIC issued downside guidance for Q4, seeing Q4 revs of $175-$185 mln versus the $190 mln consensus. KLIC (Singapore) does not have much coverage on Wall Street … it is in a cyclical industry and numbers can be quite volatile quarter/quarter and year/year.
In addition to the revenue opportunities around the gold to copper transition, demand has strengthened in the mobile device and memory segments. KLIC is also seeing increasing volumes from local customers in emerging markets, which further diversifies the revenue streams. KLIC is focused on efficiently ramping capacity and scale to meet the anticipated rise in demand. In the longer term, by leveraging their technical strength and healthy balance sheet, KLIC should be able to maintain its leading market position while exploring and entering new growth opportunities.
KLIC has a rich history of technology leadership and innovation. The company was founded in 1951 and has been publicly traded since 1961. KLIC holds leadership positions in the markets it serves. KLIC has more than 2,400 employees including 400 engineers. Their manufacturing plants, sales offices and R&D centers are spread out across Singapore, China, Switzerland, Israel & the US.
KLIC provides market leading solutions including ball bonders, wedge bonders, wafer level bonders, manual wire bonders, capillaries, dicing blades software and services.
KLIC market share in ball bonders, wedge bonders and wafer level bonders is topping 70%.
Key customers include Texas Instruments, LG, Renesas, SPIL (Taiwan), Rohm, Samsung and Amkor.
Semiconductor End Applications include: Smartphones, Tablets, Laptops, Flash Memory, Computers, Cameras, Television Sets, Pacemakers, Hearing Aids, Safety Equipment, Sensors, Vehicle Electronics, Engine Control Systems, Security Systems, Servers, Controllers and Routers.
Over the next five years unit demand is expected to jump by 10% annually led by Automotive & Industrial. Revenue growth should be up by 4%-6% annually. KLIC is well-positioned within its industry to benefit from the areas expected to be strongest (such as packaging and copper wire bonder equipment).
This is a cyclical industry and not for those who can't stomach the revenue and EPS volatility Q/Q and Y/Y. In FY 11 & FY 12 revenues were $800 mln (in each year). In FY 13 revenues will be closer to $550 mln and then rebound to $650 mln in 2014 as the cycle approaches a sweet spot. Margins have been under pressure in recent quarters and in our opinion the market has priced this in with KLIC -- market cap $850 mln -- trading at < 9X with > $500 mln in cash and no debt. Margins should improve going forward.
Our price target is $17 (or 10X $1.70 in EPS potential) looking out to 2015-2016.
Kulicke and Soffa is a global leader in the design and manufacturing of semiconductor assembly equipment. KLIC, considered one of the industry pioneers, provides market leading packaging solutions. KLIC chooses to expand via acquisition (instead of paying dividends and buying back shares). KLIC is in a good position to assist customers assemble the next-generation semiconductor devices. K&S provides the tools and equipment that are used in the production of a wide range of semiconductor devices. KLIC customers produce the chips that drive information and products such as computers, smartphones, LED televisions and media tablets.
K&S maintain its leadership position by focusing on areas that see decreases in expenses coupled with productivity improvements. KLIC is constantly making efforts to move fixed cost to variable - this in effect serves to cap the impact of semiconductor industry volatility; the very issue plaguing many of their competitors.
KLIC has an impressive history of planning for the future and navigating through volatility. KLIC also gives deep thought to where parts are to be sourced and the company partners with suppliers who have acceptable and efficient supply chain and manufacturing capabilities.
KLIC does a better job than their competition at controlling expenses, managing margins and reducing cash conversion cycle time. Overall, their sales, support, distribution and services expenses are half of the industry average. As the market continues to shift from gold to copper, KLIC is positioned to capture significant market share. KLIC sees more than $500 mln (30% market share) in revenue by 2016 in this market that is forecast to top $1.7 bln.
Related names: We currently have open recommendations in KLIC, BRCM & Skyworks Solutions, Inc. (SWKS. We exited Intel Corp. (INTC) on May 1 @ $24.11 … Lam Research Corporation (LRCX) on May 22 @ $48.01 and Marvell Technology Group, Ltd. (MRVL) on August 1 @ $13.11.