Cohu Inc. : An Undervalued Growth Stock

| About: Cohu, Inc. (COHU)

Summary

Investors who took positions in Cohu Inc. stock one-year ago would have earned a whopping return of 60.43%, 29.5% YTD.

Analysts are expecting Cohu to post EPS of $1.16 in 2017. That represents a rise of 71% from $0.68 in 2016. This implies a 2017 forward P/E at 15.51x.

Price/Book ratio is 2.1x and Price/Sales ratio is 1.8x way below industry average and S&P 500.

Debt free and positive street expectations.

Source : Morningstar

Investors who took positions in Cohu Inc. (NASDAQ:COHU) stock one-year ago would have earned a whopping return of 60.43%. During the same period, the Nasdaq earned 21% in capital gains. Cohu has a 12-month low of $10.01 and a 12-month high of $18.67 (CMP $18.00). The firm's market cap is $480.59 million.

Source: infinancials

YTD (year-to-date), the stock has outperformed its peers (peers median return 17.2%) & have earned a return of 29.5%. During the same period, the Xcerra Corp. (NASDAQ:XCRA) earned 17.8% and MKS Instruments (NASDAQ:MKSI) earned 15.0%.

Given the stock's recent performance, it seemed like a good time to take a closer look at the company's earnings, peer analysis & valuation, street expectations & fundamentals.

Cohu last posted its earnings for Q42016 on Feb 16th. The company reported adjusted EPS $0.24 for the quarter, topping street estimates of $0.09 by $0.15. The company had revenue of $70.7 million for the quarter (up 11% YoY), compared to the street estimate of $65.1 million. During the same quarter in the prior year, the company posted 0.09 adjusted EPS.

Luis Müller, President and Chief Executive Officer of Cohu stated, "We delivered growth in fiscal 2016 with sales up 4.6% year-on-year, a non-GAAP income increase of 20% and approximately 2-points market share gain in test handlers. We also grew our contactor business and executed the acquisition of Kita, creating sales synergy opportunities at Cohu's large installed base of handlers at automotive and mobile customers." Müller concluded, "We started 2017 with strong order momentum and a plan to further expand sales and profitability. Customer and end-market diversification as well as growing revenue contribution from recurring, that includes test contactors, are driving improved predictability in the business model."

Management Guidance

Cohu expects first quarter 2017 sales to be approximately $78 million.

Earnings Surprise History

Source : Reuters

Cohu has a striking earnings surprise history with an average positive surprise of 54% over the trailing five quarters, beating estimates all through.

Now, does this trend continue?

Source : Reuters

Analysts are expecting Cohu to post EPS of $1.16 in 2017. That represents a rise of 71% from $0.68 in 2016. This implies a 2017 forward P/E for shares at 15.51x. Analysts are currently expecting 2018 EPS of $1.40, which implies a 2018 forward P/E for shares at 12.85x. This is way below the S&P 500 forward P/E of 19x. In other words, despite the stock's outperformance year to date, Cohu remains poised to deliver value.

Income Statement Analysis

Source : Morningstar

The company had revenue of $282 million for the FY2016 (up 4.6% YoY). Currently, analysts expect Cohu to generate revenue of $341 million (up 21% YoY) in fiscal 2017 and $370 million (up 9% YoY) in fiscal 2018. This was primarily due to order momentum in automotive, mobility and IoT markets .

Over the past 4 years, operating income margin improved by 1,649 bps (negative 14.48% to positive 2.01%). During same period, EBITDA has improved to 5.70% from negative 9.03%. Also, net income margin improve from negative 13.51% to positive 1.16% (1,467 bps improvement).

Improving operational efficiency also contributed to free cash flow. In FY2016, free cash flow was $21 million (FCF per share $0.35), increased by $21 million, compared to FY2013. Also, Cohu is debt free company.

Current Valuation

Investors should look at valuation methodologies when deciding whether to enter or exit a stock. Valuation is driven by perceived growth, risks and investors' willingness to pay. There are various methods available to assess the valuation of a stock.

I have discussed, that based on forward P/E ratio Cohu is trading at way below the S&P 500 forward P/E of 19x.

Price/Book ratio is 2.1x which is way below industry average of 4.7x and S&P 500 of 3.0x. Also, Price/Sales ratio is 1.8x lower than industry average of 4.3x and S&P 500 of 2.1x. Cohu has dividend yield 1.3% higher than industry average.

Conclusion - An Undervalued Growth Stock To Buy Today

Revenue Growth : Currently, analysts expect Cohu to generate revenue of $341 million (up 21% YoY) in fiscal 2017.

EPS Growth : Analysts are expecting Cohu to post EPS of $1.16 in 2017. That represents a rise of 71% from $0.68 in 2016. This implies a 2017 forward P/E for shares at 15.51x.

Undervalued Valuation:

1. Forward P/E :2017 forward P/E for shares at 15.51x way below the S&P 500 forward P/E of 19x

2. Price/Book ratio is 2.1x which is way below industry average of 4.7x and S&P 500 of 3.0x

3.Price/Sales ratio is 1.8x lower than industry average of 4.3x and S&P 500 of 2.1x.

Market View - Positive

Source: Nasdaq

On April 7, 2017, Cohu's stock increased more than 60% over the last 12 months. Analysts' recommendations show a 12-month targeted price of $18.01 per share. Of the analysts covering Cohu, 1 recommended it as a "Strong Buy," 1 recommended it as a "Buy " and 1 recommended it as "Hold"

My Recommendation: Buy Rating

I will recommend Buy rating for Cohu based on the following factors:

1. Cohu has a striking earnings surprise history with an average positive surprise of 54% over the trailing five quarters, beating estimates all through and positive outlook for FY2017

2.Analysts are expecting Cohu to post EPS of $1.16 in 2017. That represents a rise of 71% from $0.68 in 2016. This implies a 2017 forward P/E for shares at 15.51x. Analysts are currently expecting 2018 EPS of $1.40, which implies a 2018 forward P/E for shares at 12.85x. This is way below the S&P 500 forward P/E of 19x. In other words, despite the stock's outperformance year to date, Cohu remains poised to deliver value.

3. Debt free company with improving FCF

4. Price/Book ratio is 2.1x which is way below industry average of 4.7x and S&P 500 of 3.0x. Also, Price/Sales ratio is 1.8x lower than industry average of 4.3x and S&P 500 of 2.1x. Cohu has dividend yield 1.3% higher than industry average.

5. Market view is positive.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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