Boring Portfolio

Boring Portfolio Report
Wednesday, January 31, 1996

As the Kulicke & Soffa conference call commenced this morning at 10 AM, the stock was up sharply to 25 3/4 per share, based on impressive first-quarter sales and earnings numbers the company released last night. During the next half hour--and as the conference was still underway--the stock dropped 5 full points, on heavy volume.

It's fair to say that this was not exactly what CEO Scott Kulicke had in mind as he drove to work today.

Kulicke spent perhaps three minutes glossing over his company's outstanding first quarter of FY96, one that was achieved in the face of some significant challenges. Barely pausing for breath, he proceeded to caution listeners that revenues for the current quarter would probably be flat as compared with 1Q and that earnings could be off by as much as 20% from current forecasts.

Kulicke went on to say that he expected strong third and fourth quarters and that he remained comfortable with analysts' consensus forecasts of EPS "somewhere in the $3.20s" for the full fiscal year (although he also said it was impossible to pin that number down to the last nickel). By that point in his presentation, however, at least some folks had already heard more than enough.

Why the expectation of lower earnings for the second quarter? As mentioned in last night's press release from K&S, a "push back" of orders from a few customers is part of the story. Higher R&D expenses associated with new products coming to market later this year, higher business costs connected with serving new Asian customers, and putting the recently-acquired American Fine Wire on a firm business footing, are some of the other pieces of the puzzle.

The order delays appear to be a continuation of ripple effects from Intel's recent foray into--and consequent disruption of--the chip-set industry. Other chip-set makers are still trying to adjust, and this has led a few Taiwanese and Korean operations to push back delivery of equipment they had ordered from K&S. (Kulicke stressed that these are delays of a few weeks or so, and not cancellations.)

The highly-publicized tribulations of the DRAM industry have a very minor impact of K&S, on the other hand. DRAM production is not a high-value business for K&S, since the number of pins (and hence the number of wires needing connection with one of K&S wire-bonder machines) on a typical DRAM chip is only around 5% as many as on, say, a Pentium microprocessor--on the order of 20 pins versus 400.

Once Kulicke got past his warnings about the current quarter, the rest of the news was actually quite positive. Gross margins continue to improve, helped by sales of highly profitable turbo upgrade kits. K&S continues to maintain--and even grow--its formidable market share. Significant new products will be coming on stream later this year. The company has managed to eke out a toehold in the tough Japanese market and has begun taking orders from firms like Fujitsu and Mitsubishi. The recent acquisition of American Fine Wire is contributing to earnings. The company would not initiate a secondary offering as long as the stock price was as "unjustifiably" depressed as it is, and in any event K&S has the cash to run the business without the offering.

Early this afternoon, Steve Jaworski (one of the analysts online for the conference), reiterated his 5-star rating for S&P, although trimming his FY96 EPS estimate to $3.28 (which is still above the earlier average estimate of $3.25). At least one other analyst issued a statement saying that the sell-off was quite unjustified, as well.

By the way, the last question this morning was asked by someone who had joined the conference a bit late. He wanted to know: Had anyone at K&S noticed what had been happening to the stock price during the past hour? Um . . . no, they had not.

After regaining his composure a bit, Kulicke responded by saying that the sell-off that was occurring as he spoke was just one more instance of Wall Street not "getting it." He said that he simply cannot understand why the stock market has failed to grasp the bigger picture of the electronics industry--why it focuses on tiny bumps in a single quarter rather than on the strong overall growth trend.

Kulicke certainly has a point there. At the same time, though, I can't help wondering if, at least as regards his company, it has something to do with the way the CEO steps all over his main message by directing attention to those tiny bumps?

My bottom line: Kulicke & Soffa is a company that will grow earnings this year in excess of 40% and that operates within a broader industry projected to double over the next four years. A p/e in the single-digits seems like more than ample discount for inherent risks.

Oh, yes. What happened with Texas Industries today? Answer: not a whole lot. Apparently, folks in the Dallas area are preoccupied with the invasion of the Gardner brothers as David and Tom continue their whirlwind tour of America. TXI was down a quarter-point today on approximately half its average daily trading volume.

--Greg Markus (MF Boring)