Entered into a 2% position of Kulicke and Soffa Industries, Inc. (Ticker: KLIC) at $5.90.
I enter into this position with my eyes open, drawn to the potential upside but wary of the risks. Only one analyst has a
Buy on it, with Jefferies
downgrading it after management's December
outlook. That said, I generally like contrarian positions.
Reasons for Buying: Low single digit P/E, potential upside to estimates, growing net cash position, significant operating and EPS leverage, attractive secular trends to drive business, and my expectation of improving economic conditions.
Risks: Volatile orders, high fixed costs, new CEO, warned last week of weaker December revenue.
Recent Weaker Management Outlook Gives Pause. Management provided revenue guidance of around $255-260 million for the September quarter, and also lowered expectations for the December quarter on October 7. Not surprisingly this announcement caused weakness in the stock. The announcement coincided with a change in CEO as the previous CEO retired after over 30 years in the position. My take is the lowered expectations for December are a combination of requested delays in delivery dates by customers during August and September, and the new CEO "lowering the bar" to ease his first quarter at the helm. Intel (Ticker:
INTC), one of the companies larger customers, had warned in August of weaker PC demand. Yesterday, Intel
reported healthy earnings, provided a more bullish outlook for the industry, and maintained full year capital spending expectations of $5.2 billion, +/- $200 million.
Valuation is hard to ignore. The current FY 2011 (FYE Sept) EPS consensus is $1.58, down from the FY 2010 consensus estimate of $2.09. The low estimates for 2010 and 2011 are $1.93 and $1.05, respectively. I find these estimates fairly conservative given my expectation of healthy real economic growth in developing countries, strengthening nominal economic growth in developed growth over the next 6-12 months, and potential secular drivers. Using the low-end 2011 estimate the stock is trading at under 6x, despite improving returns, healthy balance sheet with net cash, and potential upside to estimates. If my thesis is even partially correct the company should produce growing earnings next year, implying EPS over $2.00 next year. If EPS grows next year the P/E multiple should expand, especially if returns continue to improve and remain at the high-end of the industry.
Secular Trends Healthy, albeit Order Volume Volatile. The semiconductor industry likely continues to convert to greater use of copper in circuits, requiring new machinery that K&S provides. K&S's largest customer, ASE Global (Ticker:
ASX), is building a large new
manufacturing facility that is expected to open later in 2011, likely producing large orders for K&S. Amkor Technology (Ticker:
AMKR), the company's second largest customer, is also
expanding its manufacturing capacity due to healthy growth trends. The company has entered the LED market, which is expected to produce a CAGR of 30% over the next few years.
Weakening dollar offers mixed dynamics. Company has been re-locating assets to Asia, from Israel and Switzerland, in order to reflect demand trends and lower costs of labor. Majority of business transacted in U.S. dollars, and therefore a decline in the dollar can help boost sales. However, sourcing of commodities and supplies in dollars can produce weaker margins when the dollar weakens. Therefore, currency fluctuations are somewhat mixed.
Top 10 customers in F09:
| 1. | Advanced Semiconductor Engineering (>10% revenue) |
| 2. | Amkor Technology Inc. (>10% revenue) |
| 3. | Siliconware Precision Industries, Ltd. |
| 4. | Texas Instruments, Inc. |
| 5. | First Technology China, Ltd. |
| 9. | Micron Technology Incorporated |
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