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1 Big Winner From the Global Chip Shortage

By Timothy Green - Feb 6, 2021 at 7:20AM

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This small semiconductor-equipment manufacturer is doing very well right now.

Soaring 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 grew so quickly, according to IDC. Apple's iPads have seen a resurgence, with the tech giant reporting 40% growth in its latest quarter, and demand for the new game consoles from Sony and Microsoft is off the charts.

Tight capacity at semiconductor manufacturers is now leading to some big problems. General Motors and Ford are idling some production because they can't secure enough chips, and CPU maker Advanced Micro Devices lost market share to Intel in the fourth quarter because its chips were hard to find. Intel largely manufactures its own chips, while AMD relies on third-party foundries.

Chips on a circuit board.

Image source: Getty Images.

One industry that benefits from a shortage of semiconductor manufacturing capacity is the semiconductor-equipment industry. The companies that make the many complicated machines that are required to manufacture, assemble, and package semiconductor chips should do very well 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 (KLIC 4.03%).

An ideal environment

Kulicke & Soffa specializes in semiconductor packaging equipment. At the end of the semiconductor manufacturing process, the semiconductor material is put into a protective case and connections are made so the final product can interface with a circuit board. Kulicke & Soffa sells wire bonders which facilitate these connections, as well as advanced packaging equipment.

The semiconductor equipment industry is cyclical, with sales dependent on the pace at which semiconductor manufacturers are building out capacity. Kulicke & Soffa's results fluctuate from quarter to quarter and from year to year, as shown in the chart below.

KLIC Revenue (Annual) Chart

KLIC Revenue (Annual) data by YCharts.

The current environment is ideal for a company like Kulicke & Soffa, and it shows in its latest results. Revenue rocketed 86% in the company's fiscal first quarter on a year-over-year basis to $267.9 million, and adjusted earnings per share nearly tripled to $0.86. The company expects this strong demand to persist, calling for revenue of $300 million and adjusted earnings per share (EPS) of $0.88 in the second quarter.

"We expect trends demanding assembly complexity will increase and further enhance the capital intensity of our broad served markets over the long-term," said Kulicke & Soffa CEO Fusen Chen in the company's earnings release.

One word of caution: Slapping a price-to-earnings ratio (P/E) on a stock like Kulicke & Soffa based on current earnings can lead you astray since the company's financial performance isn't consistent. The average analyst estimate for fiscal 2021 adjusted EPS is $3.04, up from $0.95 in fiscal 2020. That puts the P/E ratio at a paltry 13.5, but that's not necessarily a good indicator of value. Using the average of that 2021 estimate and the 2020 results, the P/E ratio stands at a pricier 20.

However, analysts expect the company's strong earnings to continue into fiscal 2022. Given the extent of the semiconductor manufacturing-capacity shortage, that view doesn't seem farfetched. Kulicke & Soffa could be in for a multiyear period of exceptional results, depending on how semiconductor demand evolves.

Regardless of what happens with Kulicke & Soffa's results, the company's rock-solid balance sheet should see it through. The company had $577 million of cash and investments as of Jan. 2, and there's no debt on the balance sheet. This cash allows the company to make strategic acquisitions, pay a dividend, and buy back shares when it makes sense to do so.

Kulicke & Soffa is far from a household name, and it's one of the smaller players in the semiconductor-equipment industry. The company is thriving right now, and the stock doesn't seem overly expensive. If you're looking for a way to play the global chip shortage, Kulicke & Soffa looks like a good bet.

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Stocks Mentioned

Kulicke and Soffa Industries, Inc. Stock Quote
Kulicke and Soffa Industries, Inc.
$52.61 (4.03%) $2.04

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