Kulicke & Soffa: High Growth, Deep Value Opportunity

| About: Kulicke and (KLIC)
This article is now exclusive for PRO subscribers.

Kulicke & Soffa Industries Inc. (NASDAQ:KLIC) is a small-cap semiconductor equipment firm that focuses on the step of bonding etched silicon chips to plastic packaging. The company is a global leader in the design and manufacture of semiconductor assembly equipment. In recent years K&S has expanded its product offerings through strategic acquisitions, adding die bonding, wedge bonding and a broader range of expendable tools to its core ball bonding products.

Valuation Measures

The KLIC stock is a good combination of a deep value and high growth play. K&S has no debt at all and it has exceptionally good valuation parameters, as shown in the table below. All data were taken from Yahoo Finance and finviz.com after the market close on December 24.

Kulicke & Soffa Global Market Share

Kulicke & Soffa has an impressive 70% market share of the global wire bonder market. The total wire bond equipment market and the K&S share of this market for the years 2007-2012 are shown in the chart below.

Source: Kulicke & Soffa Presentations

The estimated wire bonded share of the total IC shipments and the total IC shipments until 2016 are shown in the chart below.

Source: Kulicke & Soffa Presentations

Since 2010 Kulicke & 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 & 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 & 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.

Sales Growth

Revenues by quarter since 2009 are shown in the chart below, the revenue for the December 2012 quarter is the average of the company's outlook (here):

The Company expects net revenue in the typically seasonally slower fiscal first quarter of 2013 ending December 29, 2012, to be approximately $95 million to $115 million.

Source: Kulicke & Soffa Chart: Arie Goren *Dec-12 estimate

The lower estimated revenue for the next quarter is due to seasonal demand and a weak IC market.

Yearly revenues since 2003 are shown in the chart below, 2012's revenue is an estimate.

Source: Kulicke & Soffa Chart: Arie Goren *2012 estimate

Since the recession of 2008-2009, revenue has increased significantly.

Growth Prospects

Semiconductor interconnect demand is expected to continue to grow at an average annual rate of 12% (CAGR). Kulicke & Soffa's explanation:

  • Wire bonding remains a prominent technology for packages below 500 lead count.
  • Alternative technologies address only a small portion of the overall market.
  • World wide consumer demand drives lead count growth.
  • Semiconductor devices per person is anticipated to increase by 55% through 2016.

Source: Kulicke & Soffa Presentations, VLSI Research, Oct 2012 (here)

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. Copper binders are expected to reach 55% of the total bonder market by 2016.

Source: Kulicke & Soffa Presentations

Growth Markets

Kulicke & 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 & Soffa's explanation:

  • Largest growth expected from general lighting applications.
  • Declining price points are the main growth driver.
  • K&S has multiple solution's that address various interconnect alternatives within the High-Bright LED market.

Source: Kulicke & Soffa Presentations

Last Quarter Results

On November 08, KLIC reported its fiscal 4Q financial results (here), which were better than Wall Street's expectations. On that occasion, Bruno Guilmart, Kulicke & Soffa's President and Chief Executive Officer, said:

The fourth quarter ended a very strong year for K&S with results at the high-end of our guidance. We are succeeding in a challenging market due to our multi-segment leadership, flexible manufacturing strategy, R&D strength, free cash flow generation and our improving, debt-free balance sheet. We were able to achieve record annual net income of $160.6 million due to the operating leverage we have created in our business combined with a favorable product mix.

Technical Analysis Trend

The stock price is 2.46% above its 20-day simple moving average, 10.95% above its 50-day simple moving average and 9.11% above its 200-day simple moving average, which indicates short-term, mid-term and long-term uptrend.

Chart: finviz.com

The MACD indicator is positive which indicates an uptrend.

Chart: Yahoo Finance


Kulicke & Soffa has exceptionally good valuation parameters; no debt at all, a very low PEG ratio of 0.63 and very low price to free cash flow of 5.05. The company has very good growth prospects because of its dominant market share, because assembly firms are moving from gold bond wires to copper wires and because of strong growing new markets, like LED lighting. All these factors make KLIC stock a good investment right now.

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.