As the global semiconductor shortage rages on, semiconductor producers are aggressively expanding production capacity to meet demand backlogs from several different industrial sectors and to prepare for a future centered around their products.
Cohu (COHU +3.06%) plays a critical role in this expansion and preparation process. It supplies semiconductor producers with manufacturing and testing equipment, as well as proprietary technologies that are important to production. Chip production is complex, and some things just can't be done in-house -- that's where Cohu fills an important niche.
Image source: Getty Images.
The California-based company just announced second-quarter earnings showing 70% revenue growth, and the indications are that this rate is likely to continue.
Testing and inspections can be lucrative
Testing is a core part of what Cohu does. It develops advanced machinery to handle and test semiconductors at a high volume. In the July 29 second-quarter earnings report, management noted that the company continues to capture new customers through its Neon inspection platform, the next-generation handler for fragile chips as small as 0.2 mm by 0.4 mm. These are commonly found in semiconductors used in automotive, consumer, industrial, medical, and mobility applications, and they are the subject of growing demand.
The automotive category has grown to be Cohu's biggest, representing 18% of its business. New cars are packed full of sensors -- they're effectively computers on wheels. The company offers testing solutions related to autonomous driving and electrification efforts that will help Cohu thrive through the impending electric vehicle revolution.
Cohu also recently revealed its entry into the world of data intelligence, with its Di-Core software designed to improve efficiency in its equipment. The goal is to collect more data from its machines to assist with predictive maintenance and diagnostics. In an industry that is so backlogged by demand, it's important to keep downtime to an absolute minimum.
Second-quarter highlights
Cohu hasn't turned a full-year profit since 2017, as it invested heavily in research and development to improve its product offering. Additionally, it has almost doubled its spending on sales costs since then to showcase its efforts and acquire new customers. It looks like those decisions are about to pay off in a big way.
The company generated earnings per share of $1.92 in Q2 2021, crushing the first-quarter 2020 result and bouncing back from a loss in Q2 last year. Suffice to say not only is Cohu on track for a profit in 2021, but it could be one of its biggest-ever yearly results.
|
Metric |
Q2 2020 |
Q2 2021 |
Growth |
|---|---|---|---|
|
Revenue |
$144.0 million |
$244.8 million |
70% |
|
Earnings per share |
($0.11) |
$1.92 |
N/A |
Data source: Cohu.
Cohu grew revenue by 70% year over year and managed to keep expenses steady. After ramping up research and development in recent years, the expense grew just 15% in Q2 on a year-over-year basis. Sales and admin costs grew even less, at just 6%. It suggests the company is now prepared to focus on its core business and expand less aggressively -- which is a win for shareholders looking for profits.
Cohu realized the sale of its Printed Circuit Board Test business during the quarter, which contributed to the strong earnings per share. It also reported adjusted financials, which exclude one-time costs and revenue items, and it still generated earnings per share of $0.89.
The PCB business has been a small contributor to revenue over the last few years, and the company notes it wasn't part of its core growth strategy going forward.
Why you should own it
Based on the company's projections (and analyst expectations), Cohu should take in over $900 million in revenue in 2021. It's double the amount of revenue the company was generating just three years ago, and with a market capitalization of $1.7 billion, the stock trades at less than two times forward sales.
The company is also estimated to deliver $3.12 in earnings per share this year, putting the stock at 11.3 times projected earnings -- significantly cheaper than the iShares PHLX Semiconductor ETF, which trades at 37.3 times.
As long as supply shortages persist in the semiconductor industry, producers will continue to seek more capacity. For Cohu, that means robust demand for its products and services well into the future. According to the Semiconductor Industry Association, global sales were up 26.4% in May (year over year). This stock is a great way to play that growth.
