FROM BRIEFING-Kulicke & Soffa (KLIC)
07-Jan-00 00:05 ET
[BRIEFING.COM - Patrick J. O'Hare] What do growth and value have in
common? Typically not much when discussing stocks as these terms are
often viewed as distinct opposites in the equity market. In fact, in the
world of mutual funds, many fund managers are given mandates to invest
only in "value" stocks or only in "growth" stocks. In the case of
Kulicke & Soffa, though, you get the best of both worlds which isn't so
bad in the current environment.
Right now, there is a rotation going on that favors value, and in many
instances, it is coming at the expense of the growth stocks, namely the
technology issues. If there are any areas in the technology sector that
are likely to exhibit better relative strength than others, we suspect
they will be the chip and chip equipment companies. Having suffered what
was a rough two years, most of those stocks emerged in the middle of
last year in resounding fashion with investors, brokerages, and industry
think tanks anticipating a cyclical upturn as demand for chips was
stoked by an increased demand for wireless, PC, broadband, and other
communication products.
In the wake of the Asian crisis, chip makers were struggling with supply
issues, and by extension, so, too, were the chip equipment makers.
Capital spending was cut as the chip industry contended with over-supply
and a commensurate drop in prices. Fortunes have turned, however, with
the Asian economies beginning to rebound and the proliferation of
communication devices. Now, that tendency among the chip makers to scale
back on production a few years ago has created a new problem: supply
constraints. The latter was most recently demonstrated in Gateway's
earnings miss being blamed on a shortage of microprocessors from Intel--
the industry leader!
If you believe the findings of the Semiconductor Industry Association
(SIA), the chip industry is expected to post double-digit gains from
1999 to 2002, with anticipated revenue growth of 15% in 1999 to $144
bln, 21% in 2000 to $174 bln, 20% in 2001 to $209 bln, and 12% to $234
bln in 2002. That's a whole lot of chips being sold, but bear in mind,
those estimates are predicated on assumptions of a healthy worldwide
economy, 13%-17% PC market growth, and that Internet usage will soar to
1 billion users by 2005 adjoined by an "explosion" in Internet commerce.
If that bullish scenario plays out, the chip equipment makers should be
busy the next few years as the chip companies, which some fear
under-invested in their factories in the throes of 1997 and 1998, rush
to meet demand and to increase their efficiency.
Already, we have seen the vestiges of improving fundamentals for the
chip equipment makers as many companies have returned to profitability,
have noted increasing backlogs, and have posted sequential improvements
in top- and bottom-line results. Kulicke & Soffa is no exception to that
trend. The company returned to profitability in the September 1999
quarter with net income of $7,352,000 or $0.30 per diluted share. Ending
backlog at that time was $93 million compared to $88 million at the
beginning of the quarter, and sales were up 38% on a sequential basis to
$153,375,000. Commenting on those results, Kulicke & Soffa's CEO, C.
Kulicke, proved prescient when noting that excellent customer
receptivity to its new 8028 wire bonder and record business in its
packaging materials segment, combined with a cyclical upturn, should
lead to a significant improvement in results through the coming fiscal
year.
On Tuesday, the company pre-announced a positive earnings surprise for
its fiscal first quarter, indicating that it expected revenues to be in
the $175 million range, and that earnings per share should exceed the
consensus estimate of $0.36 by more than 30%. Furthermore, bookings were
very strong during the quarter and will come near $200 million. Even
though the Nasdaq posted its largest one-day point decline ever that
day, shares of KLIC still advanced 3.3% on strong volume. Reflecting the
improved relative strength of the chip equipment maker, the Nasdaq
posted its second largest one-day point decline yesterday, and yet,
shares of KLIC still edged fractionally higher. As a reminder, those
stocks that hold up best in a down market are typically the ones that
lead the market in an ensuing rebound. In many ways, this week's
performance also reflects the appeal of the stock as a value play.
Despite a strong run beginning in September that saw the stock more than
double, KLIC still trades at a remarkably attractive 20.9x est. FY00
earnings and 12.7x est. FY01 earnings-- sizeable discounts to the
overall market. As noted above, KLIC also has growth stock appeal given
its restored earnings momentum, improved visibility, and a 5-yr
projected growth rate of 16.8% that is more than a third greater than
the growth rate for the overall market.
Eventually, we believe growth stocks will regain their leadership
position, and KLIC should be right there when they do, but it can still
serve as a safe haven in the current environment given its discounted
valuations. In short, this stock has broad-based appeal from an
investment standpoint that should help it stand out above most others in
good times and in bad.
Patrick J. O'Hare
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