Although we have been dealing with it for a year now, the world is still in a semiconductor shortage. The pandemic caused a surge in demand for digital solutions, from artificial intelligence to the Internet of Things to cloud computing and more. Yet more production capacity is expensive and time-consuming, with the industry caught off-guard after the trade war of 2018 and onset of the COVID-19 pandemic in 2020.
And even though demand for semiconductor equipment is roaring back, many semiconductor equipment stocks have sold off recently with the general technology market. That doesn't make much sense, given that these companies have record backlogs and have already sold out for the year.
Furthermore, semicap (or semiconductor capital) equipment stocks are trading at below-market multiples, despite generating lots of cash. Yet even among semicap equipment stocks, advanced packing company Kulicke & Soffa (KLIC -0.14%) is especially cheap. And it just raised its buyback program in a big way to a large part of its market cap. That could be a big opportunity for shareholders.
What Kulicke & Soffa does
Kulicke & Soffa makes a variety of machines for advanced packing. These are machines that lay down the connections between chips and other elements in circuit boards. Additionally, K&S makes machines for mini and microLED applications for advanced displays, as well as packaging for batteries and other elements inside electric vehicles.
The semiconductor industry strives for ever more computing power in smaller form factors with less power consumption. Yet that is becoming more difficult as front-end semiconductor production bumps up against the laws of physics. The world's foundries are already producing 5 nanometer chips today, but according to reports, even global foundry leader Taiwan Semiconductor Manufacturing is struggling with yields at the 3 nanometer node.
If improvements are more difficult to come by on the front end, that means efficiencies will have to come from the back end, in the packaging of processors, memory, and accelerators in new and more efficient designs. That spells continued tailwinds for Kulicke & Soffa.
Despite this, Kulicke & Soffa is the cheapest semiconductor stock around
Even with this favorable outlook, Kulicke & Soffa is the cheapest semiconductor stock I've found. Currently, the stock trades at a little less than a $3.2 billion market cap, yet it also has over $800 million in cash and equivalents on the balance sheet and no debt, giving it an enterprise value of just $2.4 billion.
Amid a very strong year, Kulicke & Soffa made $452 million in net income over the past 12 months. So the stock is trading at just 7.1 times earnings, stripping out the company's excess cash, and it's only trading at 5.3 times earnings.
That certainly implies the market expects revenue and earnings to decline. To be fair, Kulicke & Soffa has had a record year in fiscal 2021, but management has guided for revenue and earnings to remain at similar levels in 2022. And even those figures may be conservative; management also noted its customers are running into a shortage of wafers that may limit its recognized revenue this year. Kulicke's backlog reached nearly $700 million last quarter -- 2.5 times the backlog from one year ago.
While sales are above-trend right now, management is also growing its portfolio and therefore its baseline of revenue going forward. On the recent conference call with analysts, management noted recent design wins in silicon photonics applications for optical transceivers used in high-speed networking, and also said emerging growth opportunities in automotive and advanced displays are trending ahead of the plan outlined back at its September investor day.
Kulicke's conservative management is now getting aggressive
With that much cash relative to its market cap, one could say Kulicke's management has been conservative with its cash returns to shareholders up until now. However, amid its business strength and a bargain-basement stock price, it's now getting much more aggressive.
Last October, K&S raised its dividend by 21% to a current yield of 1.33%. And amid the early 2022 sell-off, management is now getting very aggressive with share repurchases. On March 3, management announced a $400 million increase to its share repurchase program, doubling it to $800 million. K&S has been repurchasing stock over the past two years, so that program only has $492 million left.
However, just six days later on March 9, management announced an accelerated repurchase program of $150 million, or roughly 5% of its market cap at today's prices, which will be completed by the end of its fiscal third quarter ending in June. That's a huge amount for K&S; for context, it bought back just $15.4 million in its most recent quarter.
Given the market turmoil today, K&S is being punished along with a lot of other technology stocks, even though demand for its machines is strong and its valuation is low. With the normally conservative management stepping up share repurchases in a big way, Kulicke & Soffa is an under-the-radar opportunity amid the chip shortage today.