It appears that the downturn in the semiconductor sector that began last year may be coming to an end, at least for some of the smaller equipment suppliers. Small-cap Ultratech
Last week, Cohu
For the second quarter, Cohu reported revenue of $51.8 million versus $47.3 million a year ago. Despite the higher revenue, earnings actually dropped to $5.6 million from $6.9 million, partly because of lower gross margins and higher selling, general, and administrative expenses. So, then, why did the shares jump almost 14%?
The big leap was probably due to a strong outlook for the rest of the year. New orders during the second quarter tallied $71 million, which is a significant increase over the $44.4 million achieved during Q1. Furthermore, the backlog, which represents orders that have been received but not yet filled, increased 30% during the quarter.
Even though business is picking up, there are some factors that make me uncomfortable. One is that about half of the revenue comes from just two customers: Intel and Texas Instruments
Another factor is disclosed in this statement from Cohu's annual report filed with the Securities and Exchange Commission: "The semiconductor equipment industry in general and the test handler market in particular is highly competitive." It is true that the semiconductor market is extremely competitive, so saying that it's more competitive than most semiconductor segments is really saying something.
Lastly, the price ratios are a concern. The price-to-earnings ratio, which is 28, is definitely not in bargain territory. The price-to-sales ratio is around 3, which is a historically high level. Even if you think the current growth rate justifies these multiples, don't forget that the semiconductor industry is notoriously cyclical. While I have no doubt that this stock can push higher if business continues to hum along, I don't believe it offers a great risk/reward profile at the current price.
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Dan Bloom doesn't own shares of any company mentioned in this article. You can send him an emailif you would like to comment about this article.