Expanded my position in Kulicke and Soffa (KLIC $6.00) to ~4% from ~2% because:
(1) Secular Driver
Secular trend of its semi customers converting from gold to copper with less than 20% complete. Both Siliconware Precision Industries (SPIL $5.15) and ASE Inc. (ASX $4.55) have voiced their intent to continue their migration to copper from gold. They expect to have about 20% of their product migrated to copper by the end of this year and increase this percentage to over 40% by the end of 2011. This planned migration, in addition to other players investments, should provide a healthy tailwind for the company next year. While other companies are entering the market with copper solutions, the company should maintain a lead in bringing the performance of copper up to that of gold. (backlog up 500% y/y).
(2) Improved Visibility
No secret the business is a roller coaster with the current period fairly uncertain as to whether the business slides backward or continues to grow. That said, the backlog increased 500% y/y last quarter to $252 million and only about 25% of the backlog is expected to be used in the December quarter. I understand why investors are nervous since historically the business has slowed materially after a good year. However, I believe the secular trends and unusual business recovery (more elongated and shallow than normal) should enable the company to produce a stronger -than-expected 2011.
(3) Low Valuation
Low valuation of under 5x the estimated updated consensus F2011 EPS of $1.30. Assuming a healthy cash collection from A/R during the December quarter, the net cash balance should reach ~$100-$120 million, or around $1.50 per share. Assuming an EBITDA of $20 million in the December quarter, slightly lower on a y/y basis, the EV-to-C10 EBITDA is less than 2x. At the very least, at these prices the company should attract some interested strategic buyers.
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