Why Shares of Amkor Technology, Inc. Skyrocketed

Is this meaningful? Or just another movement?

Alex Planes
Alex Planes
Feb 10, 2015 at 3:02PM
Technology and Telecom

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Amkor Technology (NASDAQ:AMKR) have been climbing throughout Tuesday, and were sitting on a gain of more than 23% as of 2:55 p.m. The company trounced Wall Street's expectations with an excellent fourth-quarter earnings report filed after Monday's closing bell.

So what: Analysts had expected Amkor to earn $0.14 per share on $780.5 million, but the company blew past these numbers with an adjusted quarterly profit of $0.38 per share on $853.1 million in sales. The company's gross margins  increased by a full 3% year-over-year, from 19.9% a year ago to 22.9% in the fourth quarter. The company's stronger margins topped its own earlier gross margin guidance range of just 17% to 20%. CEO Steve Kelley credited the company's strength in mobile communications for Amkor's fourth-quarter outperformance -- this sector contributed 60% of Amkor's quarterly revenue, up from 55% in the year-ago quarter.

Looking ahead, Amkor expects to earn between $0.04 and $0.14 per share on revenue that will range from $715 million to $765 million for the first quarter of 2015. The company's top-line guidance comes out ahead of Wall Street's expectation  for $730.9 million at its midpoint, but Amkor's EPS guidance only reaches Wall Street's consensus estimate of $0.09 at its midpoint.

Now what: This was undoubtedly a strong report, and Amkor's 15.5 P.E still appears reasonable at first glance. The company's adjusted P/E (Amkor does not count its litigation settlement costs when calculating its adjusted earnings) looks even better, as it's still in the single digits at 9.9 after today's pop.

However, Amkor's high capital spending has pushed its free cash flow into negative territory for the 2014 fiscal year, and the company's long-term free cash flow trend  is not favorable. Since Amkor expects to spend another $600 million on capital expenditures this year, it may not be moving in the right direction with this important metric just yet. I'd weigh valuation against cash flow before deciding to buy anything, even considering the strength of Amkor's fourth-quarter beat.