The COVID-19 pandemic triggered supply chain disruptions in most manufacturing-based industries. The effects have persisted in 2021, but few have been as consequential to global commerce as the shortage in semiconductors. The lack of supply has driven rising prices and falling inventories in small devices like smartphones and big-ticket items like cars -- which are now more reliant on advanced computer chips than ever before.
The backlogged demand has led to major upside in the share prices of most semiconductor producers, but there may still be opportunities to join the action. Cohu (COHU 1.37%) is a California-based service company that supplies a portfolio of necessary testing equipment and services to semiconductor manufacturers. At just three times trailing-12-month revenue, this stock could be of great value as companies race to expand their production capacity.
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The business of services
Computing is growing more advanced and becoming more and more a part of our everyday lives -- today, some refrigerators even offer digital screens and internet connectivity. Manufacturing the components that drive these capabilities can be incredibly complex, and most companies are unable to fulfill all of their needs in house. Cohu fills an important gap here, not just providing essential equipment but also over 20 training courses for employees, offered across America, Asia, and Europe.
While Cohu reports sales under two key segments -- semiconductor test and inspection, and printed circuit board (PCB) tests -- it serves a broad variety of markets. These include:
- Automotive (autonomous driving, electrification, safety)
- Computing and network (datacenter and cloud)
- Consumer electronics (TVs, gaming, wearables)
- Optoelectronics (LiDAR, LED, connectivity)
- Industrial and medical (automation, remote security, medical ICs)
- Mobility (5G to mmWave, power management, application processors)
As cars trend more toward electrification, Cohu has developed specialties in autonomous driving, infotainment, and the electric drivetrain. It offers testing, handling, and interface solutions for the components that drive all of those features. The company has the ability to run extensive tests on the ever-growing number of sensors on modern day vehicles, putting them through stringent environmental circumstances to ensure they perform in the real world.
Improving financial performance
Cohu is losing money, and has been for the last three years -- it hasn't turned a full-year profit since earning $1.14 per share in 2017. However, since then, it has grown its revenue by over 80%. The recent losses stem from a more than doubling in research and development (R&D) expenses since 2017, and a near-doubling in sales, general, and administrative (SG&A) costs over the same period.
It indicates the company has invested aggressively in growth, and it appears to be paying off as losses are quickly narrowing. In fact, in the fourth quarter of 2020, Cohu generated $0.35 per share in earnings, and $0.61 in the first quarter of 2021 -- so the profits have just started to flow.
|
Metric |
2018 |
2019 |
2020 |
Q1 2021 |
|---|---|---|---|---|
|
Revenue (millions) |
$451.7 |
$583.3 |
$636.0 |
$225.4 |
|
Earnings per share |
($1.02) |
($1.68) |
($0.33) |
$0.61 |
Data source: Company filings.
While the PCB test segment accounted for just 2% of revenue in 2018, it grew to over 8% in 2020, offering a potential high-growth opportunity for Cohu -- off a low base too, as it contributed about $50 million last year.
According to Yahoo! Finance, seven analysts who cover the stock predict Cohu will earn $3.17 per share for the full year 2021, which means it currently trades at less than 11 times those earnings. This is incredibly cheap compared to the iShares PHLX Semiconductor ETF, which trades at over 38 times earnings.
Cohu's sales are growing fastest in Taiwan, rising 234% since 2018. It's followed by the U.S. (up 77%) and China (up 58%) over the same period. Heavy reliance on China and Taiwan isn't ideal at the moment, as geopolitical tensions are simmering. This could pose a risk to the company at some point in the future, if there is an escalation. However, its base of operations remains in the U.S., which should protect it against the more serious potential consequences.
Looking forward
The semiconductor shortage is likely to persist for the rest of this year and possibly into 2022. Manufacturers will probably need to continue expanding capacity to deliver more products, which means more of Cohu's offerings will be in demand.
Based on analysts expectations, and early Q1 2021 results, the company is set for a really big year. With a market cap of just $1.6 billion, it trades at just about two times 2020 revenue -- and with potential revenue over $900 million this year, that multiple could shrink substantially.
Investors are presented with an extremely cheap stock compared to the broader sector, in an industry that has booming demand and potential multi-year backlogs. Cohu is definitely a company worth considering adding to your portfolio.
