After beating analysts' expectations by a small margin in its second-quarter fiscal 2014 earnings report, Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) stock surged 7.92% on the same trading day (KLIC announced results before the market open). However, since the beginning of 2013 KLIC stock has risen only 17.1%, while the S&P 500 index has risen 31.7%, and the Nasdaq Composite Index has risen 35.9%. Nevertheless, in my opinion, Kulicke's stock is a long-term investment opportunity right now. I find KLIC stock to be an excellent combination of good value and strong growth tech stock. Kulicke and Soffa has compelling valuation metrics and strong earnings growth prospects. The company is rich in cash and has no debt at all. Furthermore, the company is the world leader in its field.
Kulicke and Soffa is a global leader in the design and manufacture of semiconductor assembly equipment. As one of the pioneers of the industry, K&S has provided customers with market leading packaging solutions for decades. In recent years K&S has expanded its product offerings through strategic acquisitions, adding wedge bonding and a broader range of expendable tools to its core ball bonding products. Kulicke and Soffa Industries, Inc. was founded in 1951 and in 2010 it moved its headquarters from the U.S. to Singapore.
Latest Quarter Results
On April 29, 2014, Kulicke and Soffa reported its second-quarter fiscal 2014 financial results, which beat EPS expectations by $0.01 (9.10%).
Second Quarter Fiscal 2014 Financial Highlights
- Net revenue of $114.2 million.
- Gross margin of 50.5%.
- Net income of $9.1 million or $0.12 per share.
- Cash, cash equivalents and short-term investments were $596.3 million as at March 29, 2014.
Second Quarter Fiscal 2014 Key Product Trends
- Ball bonder equipment net revenue increased 80.9% over the December quarter.
- 69.7% of ball bonder equipment was sold as copper capable.
- Wedge bonder equipment net revenue decreased 32.7% over the December quarter.
In the report, Bruno Guilmart, Kulicke and Soffa's president and chief executive officer, said:
Revenue in our second fiscal quarter was in the mid-range of our guidance and represented a 44% sequential increase. Our ability to generate strong gross margins was due, in part, to the strong contributions from wedge bonding, stud bumping, tools, and our service solutions, and the positive impact of our flexible manufacturing model. In addition, efforts in advanced packaging continue to produce outstanding results as the development team continues to innovate and produce deliverables against an aggressive road map.
Also in the report, the company gave an outlook for the third-quarter of fiscal 2014. The Company expects net revenue in the third fiscal quarter of 2014, ending June 28, 2014, to be in the range of approximately $165 million to $175 million.
Looking forward, Bruno Guilmart commented:
We have experienced strengthening demand in the majority of served markets and expect this trend to continue throughout the June quarter. We look ahead with great optimism as we continue to actively enhance our core market positions, expand in adjacent areas through organic development and pursue meaningful external growth opportunities.
K&S is a highly cash generative company with no debt, it has done an excellent job during the last seven years by succeeding to reduce its total debt from $251 million in 2007 to zero already in 2012, and to increase its cash position and short-term investments from $170 million in 2007 to $596 million at the end of March quarter 2014, as shown in the chart below.
Source: March Quarter Q2 FY14 Investor Presentation
K&S has an extremely low price to cash ratio of 1.87. In order to compare this value with other tech stocks, I ran the finviz.com Screener and I found out that, among the 539 tech stocks with a market cap greater than $300 million, only ten companies have such a low or lower price to cash ratio.
As of April 29, KLIC's closing price was at $13.63, and it had a trailing twelve months EPS of $0.73, this corresponds to a trailing P/E ratio of 19.47. But, if we subtract its cash per share value of $7.29 from the current stock price, we get net price of $6.34 which gives an extremely low trailing P/E ratio of 8.68. According to Yahoo, the forward P/E is at 13.50 and next year EPS estimate is at $1.01, and after subtracting the cash, we get an exceptionally low forward P/E of 6.28.
K&S has recorded strong revenue and EPS growth during the last five years. The average annual sales growth for the past five years was quite high at 10.30%, and the average annual EPS growth for the past five years was very high at 29.90%. The Street's average annual earnings growth estimate for the next five years is high at 13.50%. The PEG ratio, using forward P/E of 13.50 and the annual earnings growth estimate of 13.50%, is very low at 1.00 (forward P/E divided by growth).
Semiconductor and semiconductor equipment manufacturers have historically been highly cyclical, with periods of strong growth and high margins, which have caused companies to raise capital investment, and in effect have caused excess supply followed by periods of weakness. The economic data and companies' comments are all saying essentially the same thing, which is that the semiconductor equipment industry has already passed through the bottom of the current cycle. New internet applications will extend the compute environment to every day devices like smart television, wearable, cars, light bulbs and more. This development will increase the demand for semiconductor test equipment.
Source: March Quarter Q2 FY14 Investor Presentation
One very important parameter when analyzing a semiconductor company is the book-to-bill ratio, which is the ratio between new orders to actual sells. A ratio of above one implies that more orders were received than filled, indicating strong demand, while a ratio below one implies weaker demand. On April 21, 2014, the SEMI.ORG announced that the North American semiconductor equipment industry posted March 2014 book-to-bill Ratio of 1.06. On that occasion, Denny McGuirk, president and CEO of SEMI said:
Bookings levels for North American semiconductor equipment have remained consistent over the last few reports. We look to the months ahead for signs of any inflection.
The table below presents the North American semiconductor equipment industry's billings, bookings and the book-to-bill Ratio since the beginning of 2012.
The charts below present the North American semiconductor equipment industry's billings, bookings and the book-to-bill ratio since 1991.
Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.
The KLIC stock price is 9.57% above its 20-day simple moving average, 12.44% above its 50-day simple moving average and 13.45% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.1291, and ascending which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 64.76 approaching overbought conditions.
KLIC stock is almost neglected by analysts, only three analyst are covering the stock, one of them rates it as a strong buy, one rates it as a buy, and one rates it as an underperform. Personally I think that it is more an advantage than disadvantage, in general a stock covered by not many analysts has a better chance to increase its price by a significant rate.
In my opinion, Kulicke and Soffa will outperform the worldwide wafer fab equipment in 2014. According to SEMI.ORG, in its publication of December 03, 2013, worldwide sales of new semiconductor manufacturing equipment will increase in 2014 by 23.2% to $39.46 billion. System-on-chip (SOC) orders should trend up in 2014 as semiconductor manufacturers and test providers resume equipment purchases following a period of digestion last year.
Since 2010 Kulicke and Soffa has more than half the global market share, this means that the company's revenue is in direct relationship to the total global semiconductor sales. Kulicke and Soffa's equipments are used in the last phase of the IC production so that they can be purchased in the last moment of the assembling of the production line and the assembling companies do not have to keep a stock of Kulicke and Soffa's equipment. In contrast to most other semi equipment producers which get their orders in advance, K&S gets orders for an immediate supply and that explains the high volatility of the company's revenue and its financial results, and naturally the high volatility of the stock price.
K&S has been doing well as assembly firms are moving from gold bond wires to copper due to the escalating cost of gold. The average copper wire cost saving is about 67%, and depends on the lead count. Currently 40% of ball bonders in production are copper capable, copper binders are expected to reach 55% of the total bonder market by 2016.
Kulicke and Soffa sees some markets as very promising for the demand of its products. The Light Emitting Diodes (LED) market is expected to grow at an annual rate of 21% (CAGR). Kulicke and Soffa's explanation:
- Largest growth expected from general lighting applications.
- Declining price points are the main growth driver.
- K&S has multiple solutions that address various interconnect alternatives within the High-Bright LED market.
According to Kulicke and Soffa, the semiconductor industry is volatile, with periods of rapid growth followed by industry-wide retrenchment. These periodic downturns and slowdowns have adversely affected its business, financial condition and operating results.
The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and their subcontract assemblers and vertically integrated manufacturers of electronic systems purchasing a substantial portion of the company's semiconductor assembly equipment and packaging materials. Sales to a relatively small number of customers account for a significant percentage of K&S net revenue. Sales to its largest customers, defined as more than 10% of its net revenue, was 11.0%, 37.3%, and 21.8%, for fiscal 2013, 2012, and 2011, respectively. If K&S loses orders from a significant customer, or if a significant customer reduces its orders substantially, these losses or reductions may materially and adversely affect the company's business, financial condition and operating results.
As the world leader in the wire bond, wedge bond, stud bump and capillary markets, Kulicke and Soffa will benefit from the rebound in semiconductor manufacturing equipment spending in 2014. The company has compelling valuation metrics and strong earnings growth prospects; its PEG ratio is very low at 1.00. Furthermore, Kulicke and Soffa has an unusually strong balance sheet and zero debt, its price to cash ratio of 1.87 is among the lowest in the tech sector. KLIC net trailing P/E (after deducting cash) is extremely low at 8.68, and its forward net P/E is also exceptionally low at 6.28.
All these factors bring me to the conclusion that KLIC stock is a smart long-term investment.
Disclosure: I am long KLIC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.