The growing demand for computing devices during the pandemic has helped fuel a global shortage of semiconductor chips. PC sales exploded in 2020 as people worked from home, marking the first time since 2010 that the market has grown so rapidly, according to IDC. AppleIPads have seen a resurgence, with the tech giant growing 40% in its most recent quarter, and demand for new game consoles from Sony and Microsoft is off the charts.
The limited capacity of semiconductor manufacturers is now causing big problems. General Motors and Ford slow down part of the production because they cannot secure enough chips, and the processor manufacturer Advanced micro-systems lost market share to Intelligence in the fourth trimester because her chips were hard to find. Intel largely manufactures its own chips, while AMD relies on third-party foundries.
One industry that benefits from a shortage of semiconductor manufacturing capacity is the semiconductor equipment industry. Companies that manufacture the many complicated machines required to manufacture, assemble, and package semiconductor chips should be very successful as capacity is increased to bring supply closer to demand.
While there are many options in this space, one of my favorites is Kulicke & Soffa Industries (NASDAQ: KLIC).
An ideal environment
Kulicke & Soffa specializes in semiconductor packaging equipment. At the end of the semiconductor manufacturing process, the semiconductor material is placed in a protective housing and connections are made so that the final product can interface with a printed circuit board. Kulicke & Soffa sells bond wires that facilitate these connections, as well as state-of-the-art packaging equipment.
The semiconductor equipment industry is cyclical, with sales dependent on the rate at which semiconductor manufacturers build capacity. Kulicke & Soffa’s results fluctuate from quarter to quarter and from year to year, as shown in the graph below.
The current environment is ideal for a company like Kulicke & Soffa, and it shows in its latest results. Revenue climbed 86% in the company’s fiscal first quarter year-on-year to $ 267.9 million, and adjusted earnings per share nearly tripled to $ 0.86. The company expects this strong demand to continue, calling for revenue of $ 300 million and adjusted earnings per share (EPS) of $ 0.88 in the second quarter.
“We expect trends requiring assembly complexity to increase and further improve the capital intensity of our large, long-term served markets,” Kulicke & Soffa CEO Fusen Chen said in the release. company results.
A word of warning: Imposing a price / earnings (P / E) ratio on a stock like Kulicke & Soffa based on current earnings can lead you astray because the financial performance of the company is inconsistent. The analysts’ average estimate for FY2021 Adjusted EPS is $ 3.04, compared to $ 0.95 for FY2020. That puts the P / E ratio at a paltry 13.5, but it doesn’t is not necessarily a good indicator of value. Using the average of this 2021 estimate and the 2020 results, the P / E ratio stands at 20 more expensive.
However, analysts expect the firm’s strong earnings to continue into fiscal 2022. Given the magnitude of the semiconductor manufacturing capacity shortage, this view does not not seem overdone. Kulicke & Soffa could experience a multi-year period of exceptional results, depending on the evolution of semiconductor demand.
Regardless of what happens with Kulicke & Soffa’s results, the company’s rock-solid balance sheet is expected to come through. The company had $ 577 million in cash and investments as of Jan. 2, and there is no debt on the balance sheet. This liquidity allows the company to make strategic acquisitions, pay a dividend and buy back shares when it makes sense.
Kulicke & Soffa is far from a household name, and it is one of the smaller players in the semiconductor equipment industry. The business is booming right now and the shares don’t seem too expensive. If you are looking for a way to play against the global chip shortage, Kulicke & Soffa seems like a good bet.