Kulicke and Soffa: Potential Upside or Ridiculous Upside?
by: Jeff Andry January 09, 2011
Kulicke and Soffa Industries, Inc. (KLIC) designs, manufactures and sells capital equipment and expendable tools used to assemble semiconductor devices, including integrated circuits, high and low powered discrete devices, light-emitting diodes, and power modules. The company also services, maintains, repairs and upgrades its equipment. Its customers primarily consist of semiconductor device manufacturers, outsourced semiconductor assembly and test providers, other electronics manufacturers and automotive electronics suppliers.
KLIC operates in two main business segments: Equipment and Expendable Tools. KLIC manufactures and sells a line of ball bonders, heavy wire wedge bonders, stud bumpers, and die bonders. The Company manufactures and sells a variety of expendable tools for a range of semiconductor packaging applications.
KLIC's average P/E for last quarter was around 5, more or less, which is already low in and of itself considering KLIC's projected 13.5% 5-yr. growth rate. A PEG of 1 would require a P/E of 13.5.
When you consider KLIC's TTM EPS of $1.92, you get a current P/E ratio of 3.98 - staggeringly low, but on no reasonable basis. This is the premise behind this investment.
I've devised three approaches, ranging from conservative to liberal, which I believe could provide support for KLIC being awarded a much higher valuation:
(1) Conservative Approach: Were KLIC to continue to be valued at the same low P/E of 5 that it enjoyed for most of last quarter, its fair market value today would be $9.60. It is currently trading at $7.64. KLIC's Forward P/E is currently at 5.83 and I see this near-5 figure more in line with the low end of a fair valuation.
(2) Moderate Approach: Were KLIC to enjoy a PEG of 1, implying a fair valuation, it would be valued at $25.92.
(3) Liberal Approach: This approach is three-fold, using S&P Avg., Industry Avg., and Sector Avg. P/E ratios of 19.6, 19.7, and 22.3, respectively, resulting in valuations of $37.63, $37.82, and $42.82, again respectively.
Before the mouth-watering begins, I do not expect to be valued any time in the near future based on Approach (3). This is in large part due to the fact that KLIC recently revised Q1'2011 guidance (its fiscal year ended in September) to reflect projected revenues of $125-$135M, which is pretty much in line with what they were in Q1 of last year. With iffy initial guidance projected that ended up being later revised, I don't think the market will award KLIC with an S&P Avg., Industry Avg., or Sector Avg. P/E at any time near hereafter.
The same could also cause Approach (2) above to be ruled out. However, even if Approach (1) is used, you can still see undervaluation to the tune of about 25%. Furthermore, KLIC became increasingly better at minimizing costs last year, resulting in the company now seeing a profit margin of 18.63% on a TTM basis. On a quarterly basis, KLIC has increased its profit margin in 4 of the past 5 quarters, most recently realizing a profit margin of 21.6%. This margin was a mere 12.3% in the first quarter of last year.
Thus, even though KLIC could start off Fiscal 2011 with revenues which are the same as they were in the first quarter of 2010, KLIC's successful cost-cutting mechanisms could likely result in a much better year, earnings wise. This discrepancy in earning potential really begins to rear its head when you account for the fact that even with higher margins on nearly identical projected revenues, the consensus earnings estimate for Q1'11 is only .16 compared to realized earnings of .21 in the first quarter of last year. Thus, I fully expect KLIC to beat the consensus estimate when the company soon reports earnings (to be tentatively expected in late January or early February).
Additionally, the semiconductor industry as a whole is performing better today than it was a year ago, as evidenced by metrics such as the S&P 500 Semiconductor & Equipment Industry Group Index.
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