Kulicke & Soffa Industries: A Risky Pick That Could Pay Off

A relatively small but financially strong manufacturer of equipment and tools used to assemble semiconductor devices

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Jun 26, 2022
Summary
  • The company is cash-rich and profitable on the cutting edge of an industry with strong growth.
  • The stock trades at 6.8 times trailing earnings and sports a higher net income margin compared to the industry.
  • Investors need a good risk tolerance to wait out the headwinds facing the company.
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Kulicke & Soffa Industries Inc. (

KLIC, Financial) presents a potential opportunity for retail value investors willing to take some risk. I forecast an average price target in the low $50s over the next 12 months.

The GF Value for the stock is $80.81 per share. While the company is financially strong and on the cutting edge of a growing industry, the stock price (at $44.88 as of Friday) seems tethered to the vagaries of external factors like slowdowns in the U.S. economy, perceptions about the tech sector, supply chain issues and Asia lockdowns.

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Regardless, the company has a high GF Score of 92 out of 100, indicating high outperformance potential. It received high points for momentum, profitability, growth and financial strength, but a middling rank for GF Value.

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Putting the pieces together

The Singapore-based company designs, manufactures and sells capital equipment and tools used to assemble semiconductor devices.

Its two segments, Capital Equipment and Aftermarket Products and Services (APS), produce advanced displays that have huge potential growth in the auto industry and elsewhere. Auto offline programming is complemented by KNet PLUS, a new software product. Kulicke & Soffa also services, maintains, repairs and upgrades equipment.

Kulicke & Soffa stands on the cutting edge of an industry that will lead the future global economic growth. The world already runs on semiconductors, guiding how humanity operates. Semiconductor sales topped $468 billion in 2018. They are expected to be more than $613 billion in 2022.

While the chip shortage from supply chain disruptions hit industry sales and the global economy hard in 2019 and 2020, Kulick & Soffa prospered. Demand for its products and services grew. Additionally, shares rose 130% over the last five years. They were $23 in September 2020 and rose up to $74 over the next 12 months. The price hovered in the mid-$50s the next year as the pandemic lockdowns eased but economies stagnated.

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Financially strong

Currently, the stock has fallen 24% over the past year and declined more than 30% over the last six months. Kulicke & Soffa is sensitive to the U.S. gross domestic product stumbling. Last quarter's financials highlighted some of the other reasons for the pullback.

In the second quarter of 2022, which the company reported last May, net revenue rose 13% over the prior-year quarter but fell nearly 17% from the first quarter of the year. Likewise, the gross profit, income from operations, net income and diluted earnings per share were up from the second fiscal quarter of 2021, but down from the first quarter of 2022. Margins were higher in the second quarter than any time in the recent past.

I foresee the trend continuing until the U.S. GDP improves and lockdowns fully end in Asia. Slow economic recovery and fears of a recession are shaking investors' confidence.

Kulicke & Soffa will report earnings data for the third quarter on Aug. 2.

I forecast earnings per share will be about $1.60 compared to last year’s $1.87 for the quarter. For second-quarter 2022, diluted earnings per share were up 55% to $1.95, but down 11% from the year-ago quarter.

Reasons to be bullish

Three attributes underpin my overall bullishness for Kulicke & Soffa.

First, the company holds almost $700 million in cash and equivalents. The company rakes in twice the profit of the industry and has a higher net income margin of around 28% compared to an industry average of 16%. Insiders own a relatively large portion of shares at 8.46%.

Second, selling in the $40 range, the stock trades at 6.8 times trailing earnings. The market for Kulicke & Soffa’s products is heating up; there is growing pent-up demand for advanced displays, autos, appliances and new products that bode well for the company’s products and services.

Third, management is buying back stock and announced a bigger, faster repurchase program of $150 million, retiring 4% of the stock.

Risks

Be aware that hedge funds sold over half a million shares during the first quarter. Corporate insider's selling of shares starkly outstrips their purchases of shares in 2021 and through 2022. The dividend does not drive enthusiasm at a 1.46% forward yield. The payout is the same for the last four years.

Another risk for retail investors is the stock has a high volatility beta rating of 1.43. The share price moves up and down more than the stock market. Short interest is a whopping 13.7%. The forward price-earnings ratio is a mere 6.15 after hitting 8 in February.

Outlook

The outlook for the semiconductor industry is bright. It might grow 10% annually or more if the economy stabilizes, the pandemic subsides and supply chains return to normal levels. In the meantime, Kulicke & Soffa’s strength lies in its profitability and conservative management that currently prefers stock repurchase programs to expanding by mergers and aquisitions or attracting investors with dividend increases. I do not forecast any price decline below $40, but it is going to be a while before shares move impressively higher.

Additionally, the industry has been filled with mergers and acquisitions over the past several years. Kulicke & Soffa’s tiny $2.5 billion market cap might make the company a tasty treat for a behemoth in the industry. As such, institutional investors might push management to seek out a healthy financial partner that will grow the business and value more rapidly. This potential makes Kulicke & Soffa worthy of the risk.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
Rating:
5 / 5 (1 votes)
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