Kulicke and Soffa Analysis
Board: Value Hounds
You may all be familiar with Kulicke and Soffa. Ticker KLIC. I was not. I stumbled across it recently on a Joel Greenblatt screen. Next, I found it had been a recommendation of Rex Moore as part of his TMF Rising Star Portfolio.
First thing I noticed - company HQ is in Singapore. It was founded in 1951 by Fred Kulicke and Al Soffa. Okay, so I wanted to know more.
What do they do?
From Rex Moore TMF rec. - http://www.fool.com/investing/general/2011/06/24/rising-star...
He writes better than I do, so i just found it and put it out there. Also kind of an in memoriam, since he doesn't do his portfolio anymore. Good stuff. nothing lasts.
I didn't (and still for all practical purposes don't, but..) know what a manufacturer FOR Semiconductors was all about, this bonding and bumping, so I read through one of their recent Investor Day presentations:
I found that really interesting/ cool. OK. so I went back and read their history:
I absolutely love companies that make stuff for over 50 years. and I like the picture of the two old guys shaking hands firming up the deal. Did you know, according to their history page, that they are a founding company on the NASDAQ?
So, I got the feel I wanted. It was time to dig some into the numbers:
Yahoo Finances Key Statistics:
$498mm in cash and no debt.
ttm ROE 25%
$6.63 Cash per Share on hand.
Analyst (2) Estimates next five years: 13.5%
Gurufocus publishes 10 year financials that are great for a company like this:
The chart parameter settings on that page are also cool for those looking for quick overviews of metrics and ratios.
I always like to go to their DCF Calculator (same page as above) and type in '0' per cent growth. With 0 growth, DCF says it is still worth $15/share, a 25% upside to today's price.
Their most recent quarterly report is here:
Tomorrow they release their next earnings report.
So what have I distilled from all of these ingredients, like the wine I am enjoying while I write this?
1. Business revenues have always been cyclical and will continue to be so. Important part of future semiconductor demand is tied to consumer devices and interestingly mirrors World GDP and will know volatility.
2. In 1995, the company embarked on a strategy to take advantage of the opportunities that the world of computers was opening. They began to acquire companies in diverse areas tied to semiconductor manufacturing and expanding their capacity. In the mid-2000's, they appear to have arrived at a formula (with respect to profitability, COG's, etc.) that directed them to divest themselves of non-core areas and make the bonding and the bumping their core business (I would love to own part of a company that does bonding and bumping). According to their investor day presentation, the strategy appears to be working, with leading market shares in respective markets and healthy, and, apparently, reliable margins driven by high quality products in demand.
Above all, a central theme to future profitability and technological advancement/advantage is the conversion from gold wires for the manufacturing of semiconductors to copper. From just the crudest observation - copper costs less than gold. If the quality is there, this appears to be a no-brainer. And it appears to be a relatively new technological advancement that has not gained universal acceptance, giving the company apparently favorable future prospects.
What I do not know is how many competitors currently produce or plan to change to processes using copper and not gold and obviously as a layman am totally ignorant of the practicality and/or sustainability of the technology other than to say that I am aware of the importance of the Semiconductor industry.
3. They have a healthy R&D with a broad geographical footprint, from Asia to California.
4. Since 2003, the stock has traded between $5 and $16.
Since 2003, they have gone from having $70mm cash on hand and $300mm in debt, to 2013 where they now have $498mm cash on hand and no debt.
Apparently, after their stock crashed during the Great Recession, they learned a valuable lesson about debt and leveraged growth and the stock price.
Since Sep 2009, they have been cash flow positive for 4 years in a row, avg. around $140mm/yr. with CAPEX only around $7mm/yr., they have improved their gross margin from 40% to 46% in that time, and the stock price has seen a 4 year consistent trend pattern for the first time in at least the last decade.
Given the stated cyclicality of their industry, KLIC has appeared to found that sweet spot of positioning themselves for healthy profitability during the growth cycles and cushioning themselves against the low cycles by having higher margin, market leading products (copper wire bonding instead of gold wire) and coupling that with close customer relationships with industry leading manufacturers.
KLIC is a company with a simple (cough) and focused business strategy, reliable reporting of financial performance, financial statements that tell the same story as the investor day presentation, but a little bit more :), geographical diversity, low CAPEX manufacturing with good margins/cost competitiveness in cyclical industry, low to no debt with good ROE, transparent and non-redundant management structure, with low P/E, high cash per share/but low P/B value.
Book Value per Share has increased from $1.92/share in 2003 to the ttm BV/sh of 8.64, while their current P/B = 1.30.
I think the most relevant question to my investing thesis would be:
IF they continue their capital accumulation over the next 3 years AND the world doesn't go into recession, what do they plan to do with soon to be over $ 500mm in cash and potentially $ 900mm in 3 years (assuming $140m/yr. cash and current share count of ca. 75m = $ 12.00/share in cash)
KLIC is currently trading for $ 11.84
I think it is an interesting company to read about.