A Momentary Pause for Ichor
The third quarter of 2018 is shaping up to be a trough for companies like Ichor and there is a popular saying that if semi OEMs catch a cold, then suppliers such as Ichor will catch pneumonia. However, Ichor and other companies in the sector have a highly variable manufacturing cost structure, which means they can quickly align their cost structure to the revenue outlook. I think this trough represents an excellent opportunity for Ichor to prove that concerns for its business in a downturn are overblown.
A simple way to think about Ichor is like this - the company works for Lam Research and Applied Materials which work for Micron, Samsung ( OTC:SSNLF) and SK Hynix ( OTC:HXSCL). In 2017, 53% of Ichor's sales came from Lam Research while 40% came from Applied Materials. And traditionally, the largest customers of the latter are Samsung, Taiwan Semiconductor, Intel ( INTC) and Micron.
For the quarter ending September 30, Lam Research expects revenues to drop by 26.5% Q/Q and EPS to decrease by close to 40% Q/Q. Note that despite the strong decline, the gross and operating margins are almost unchanged due to a highly variable manufacturing cost structure.
Ichor, in turn, expects revenue to be in the range of $175 to $185 million. GAAP diluted EPS are seen in the range of $0.29 to $0.37 and non-GAAP adjusted diluted EPS in the range of $0.49 to $0.57. The company has said that it believes that a downturn is the time to gain market share through product proliferation and qualifications, which is the reason EPS are not around $0.60. Ichor has cut its Q3 manufacturing headcount by around 20% but it has refrained from cutting key R&D and marketing resources.
If we take the middle point of the guidance, revenues are expected to decrease by 28% Q/Q while EPS are down by 48% (or 41% if R&D and marketing was downsized). The company will still make a significant profit despite the fact that it's not cutting spending in key areas such as engineering, marketing or sales. And as you can see, these are numbers that are close to Lam Research, Ichor's main customer. This begs the question, why is Lam Research currently trading at a TTM PE ratio of 13.39 while Ichor's is at 8.09?
Lam Research expect the September quarter to be the low point of its financial year and it believes that the long-term trends of the industry are as compelling as ever. The expectations are that the December quarter will be better and that the first half of 2019 will be stronger than the second half of 2018.
Ichor has outgrown the wafer fab equipment industry since 2014 with a 38% annual growth versus the industry's 14%. It plans to continue to outgrow the industry - while wafer fab equipment is expected to grow in single digits in 2018, the company plans to grow at several times that rate and could do so again in 2019.
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