Smart Money Interactive had an article today on KLIC....a value play
DAILY SCREEN
IS THIS STOCK CHEAP ENOUGH?
KULICKE & SOFFA INDUSTRIES
IT'S BAD ENOUGH when your customers no longer want your products. But imagine how frustrating it is when your customers still want your widgets but don't have the money to pay for them.
That's part of the conundrum facing Kulicke & Soffa Industries (KLIC), a semiconductor-equipment maker that does 80% of its business in Asia. Korean semiconductor companies want to buy Kulicke's machines but are having trouble obtaining the letters of credit they need to close the deals. No wonder the company's stock has dropped from a high of 58 3/8 to 18 7/8.
Most analysts couldn't even get particularly excited Thursday when Kulicke apparently beat consensus earnings estimates. For its fiscal first quarter ended Dec. 31, the company earned 29 cents per share on sales of $123 million. Analysts surveyed by First Call had been expecting net income of 22 cents a share.
The trouble is, those strong numbers came after the company had already preannounced twice that it wouldn't meet first-quarter projections. Last October, when analysts were expecting 59 cents a share, Kulicke said earnings would be about a third lower than that because its delivery on some new machines was delayed when customers experienced problems during testing. The stock price fell 17% to 39 that day.
Then, in December, when First Call estimates were down to 38 cents for the quarter, Kulicke warned that earnings would be in the 20s. The main problem this time was the delays in orders from Korean semiconductor companies, which account for 20% of its business. The company also said that it was having problems ramping up production of one of its new machines. The stock price dropped 27% to 18 1/8 that day and triggered downgrades throughout the equipment sector.
Given all the warnings, analysts were relieved on Thursday that more problems hadn't surfaced. "They came back today a little higher than expected -- which is good," says Susan Billat, of BancAmerica Robertson Stephens. "When companies preannounce twice, you always worry that things might continue to go south." But she says comments from management about future earnings were mixed and she is maintaining her "long-term attractive" rating on the stock.
With a combination of Asia-exposure and problems with its transition to a new line of machines, it's not surprising that Kulicke, like most semiconductor plays, is still trading near its lows. The stock declined 5% Thursday to close at 18 7/8.
So why even think about investing in this stock? In a phrase, industry dominance on the cheap. Kulicke & Soffa is among the world's largest makers of semiconductor equipment used in the assembly phase of chip fabrication. Two-thirds of revenues are from "wire bonders," which are a kind of high-tech sewing machine that connects the circuit to the package it sits in. Kulicke also manufactures the high-precision saws used to cut the sheets of silicon into individual wafers. Its top customer, with 14.3% of sales last year, was Anam, a Korean semiconductor-packaging house. Other customers include Intel (INTC) and Lucent Technologies (LU), as well as Taiwanese chip packager, Advanced Semiconductor Engineering. Some analysts say the huge Asia revenues are misleading since most of Kulicke's customers there are contract assemblers working for U.S. companies. Effectively, says Jay Deahna, an analyst with Morgan Stanley Dean Witter, most of those revenues are just passing through Asia.
Kulicke is one of the cheapest stocks in its group. It is Kulicke's low price relative to its high cash flow that landed it on our Cash Flow Screen (see recipe). The company's projected long-term growth rate is 19%, yet its 1998 price-to-earnings ratio is only 10 -- less than half the industry average. Its price-to-book ratio is 1.4 while the industry average is 1.8 and the S&P 500 averaged 5.5. "It is trading at more than a 50% discount to the rest of the group," says Deahna. "From a valuation perspective, it is one of the cheapest, if not the cheapest semiconductor-equipment company."
"It's not the lowest multiple it has ever sold at, but it is in the lower end of the range," says Lawrence Borgman, of Josephthal & Co. But earlier lows came during a cyclical downturn for the industry. Despite concerns about overcapacity and slackening demand, most analysts still think the semiconductor-equipment industry will show double-digit growth.
That's not to say Kulicke doesn't have further to fall if Asia's problems worsen. Management told analysts in a conference call on Thursday that revenues would be flat going forward, which is worse than Wall Street had been expecting. Billat said she was also disappointed to hear that shipment of a new product developed with PRI Automation (PRIA) was delayed a quarter. Kulicke's "flip-chip" subsidiary won't break even until the end of the year; Deahna was expecting it to turn profitable by spring. Management also warned that growing popularity of sub-$1,000 PCs could have a negative impact on overall demand for its wire bonders since the less-powerful chips in those machines require fewer bonds than those in high-end PCs.
But there is a significant margin-expansion story going forward. Kulicke's new 8000 family of wire bonders are more expensive and have higher gross margins. The transition to the new products seems to be going better and demand appears strong, says Billat. For the first quarter, 20% of wire bonder revenues came from the new machines.
Some say it is too early to invest in the stock. Martin Whitman and Curtis Jensen, managers of Third Avenue Value (TAVFX), passed over Kulicke, even though they are buying up other semiconductor-equipment stocks like Silicon Valley Group (SVGI) and Veeco Instruments (VECO). "We're cautious because they do so much business in Asia," says Jensen. Jeff Middleswart, an analyst with David W. Tice & Assoc., a firm that specializes in sell recommendations, says he doesn't like any companies in the sector. Even if the December quarters hold up (most of the companies say the impact has come in the past couple of weeks), he thinks March and June could be hard hit. In a bust cycle for semiconductor equipment, he says they trade below book value. Kulicke would have to get down to 8 or 9 a share for him to think the stock was cheap.
You can watch it to see if it falls that far before buying. But at under 20, the company is close to its 52-week low. And most analysts expect demand for chips and chip equipment to remain relatively strong. According to our screen, Kulicke is pretty cheap already.
-- By Amey Stone |
