As earnings season rages on, the broader stock market has continued to decline. Economic headwinds, including the potential for interest rates to rise much faster than expected, are dampening investor sentiment, pushing the S&P 500 index down almost 8% year to date.
In times of volatility, it's a good idea to focus on companies with strong fundamentals. Those that operate in growing industries and are delivering profitability tend to carry less risk than high-flying tech stocks that are still in their growth phase.
Semiconductor-service company Cohu (COHU 0.20%) reported its full-year 2021 financial results on Feb. 10, beating analysts' earnings-per- share expectations, and making it a great addition to any portfolio in uncertain times.
Cohu's unique position
Cohu makes testing and handling equipment for semiconductor manufacturers. Semiconductors are the advanced computer chips that power computers, data centers, smartphone devices, and even cars. As our consumer goods are trending further toward digitization, the demand for these high-end chips is soaring, especially in the automotive sector, which continues to be hard hit by shortages of them.
The global pandemic triggered lockdowns across Asia and Europe, which are major semiconductor-producing regions, so upon the resumption of manufacturing the industry has been playing catch up to alleviate major order backlogs. To speed up the process, many producers have opted to increase their manufacturing capacity, and Cohu's products are essential to those expansion plans.
The company's equipment is designed to test and inspect semiconductors both during and after production, ensuring they're ready for real-world applications. Its Neon inspection system can handle small, wafer-level chips used in the automotive segment, and it was one of the key drivers of Cohu's financial success in 2021.
In fact, the automotive segment is now the company's largest, making up 17% of total revenue in the fourth quarter.
A record year
Analysts were expecting Cohu to generate $3.01 in earnings per share during 2021, but it crushed that mark by 14%, delivering $3.45. It also marginally beat revenue estimates, with a company-record $887 million.
The strong earnings result was a sharp turnaround from 2020, when it delivered a loss of $0.33 per share. In fact, it was the company's first profitable year since 2017, and it highlights Cohu's ability to execute in an industry that went through a major growth period during 2021. On the revenue side, its $887 million result represented 39% growth compared to 2020.
Cohu maintains a mid-term financial model for investors, projecting its revenue and earnings for the next three to five years. In December, it upgraded that forecast to $1 billion in annual revenue, and $4.00 in annual earnings per share, indicating there's still plenty of room for growth.
Wall Street predicts major upside for Cohu stock
Based on its $3.45 in 2021 earnings per share, Cohu stock trades at a price-to-earnings multiple of just 8.9. That's 68% cheaper than its semiconductor-industry peers, represented by the iShares Semiconductor ETF, which trades at a multiple of 28.6. It implies that Cohu would need to triple in value to trade in line with the broader sector.
Wall Street analysts aren't quite that bullish, but they have a consensus price target of $45 on Cohu stock, implying upside of 45%. But one firm, Rosenblatt Securities, thinks Cohu could soar to $65 per share, a whopping 110% higher than where it trades today.
Semiconductor shortages are widely expected to persist during 2022, especially for the automotive sector, so Cohu faces an opportunity this year to deliver a similar performance to 2021. But over the long term, more consumer products will likely go digital, requiring the advanced chips that should continue driving demand for the company's equipment.
That makes Cohu a great addition to any diversified stock portfolio.