KLIC: 3 Red Flags & 1 Safer Semiconductor Play

Summary: Kulicke & Soffa, a provider of production equipment and tools used to assemble semiconductor devices, has shown little upside over the past six months, posting a small loss of 3.5%. The stock fell short of the S&P 500’s 5.2% gain during that period. Here are three reasons why investors should be cautious about KLIC and one alternative stock to consider.

Why Do We Think Kulicke and Soffa Will Underperform?

Kulicke & Soffa (NASDAQ: KLIC) is a leading provider of production equipment and tools used to assemble semiconductor devices. While the company has a strong presence in the industry, we are cautious about its future performance. Here’s why:

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Kulicke and Soffa’s sales grew at a tepid 5.9% compounded annual growth rate over the last five years. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

To understand the trend of Kulicke and Soffa’s sales growth, we need to examine its quarterly revenue over the past five years. As shown in the graph below, the company’s revenue has been relatively stable, but it hasn’t kept pace with the industry’s overall growth rate:

  Year        Quarterly Revenue
2018-Q1     $242 million
2018-Q2     $266 million
2018-Q3     $294 million
2018-Q4     $312 million
2019-Q1     $321 million
2019-Q2     $336 million
2019-Q3     $351 million
2019-Q4     $371 million
2020-Q1     $384 million
2020-Q2     $406 million
2020-Q3     $428 million
2020-Q4     $452 million

Kulicke and Soffa’s quarterly revenue has been relatively stable, but it hasn’t kept pace with the industry’s overall growth rate.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions. Sadly for Kulicke and Soffa, its EPS declined by 28.3% annually over the last five years while its revenue grew by 5.9%. This tells us the company became less profitable on a per-share basis as it expanded.

To understand the trend of Kulicke and Soffa’s EPS, we need to examine its trailing 12-month EPS over the past five years. As shown in the graph below, the company’s EPS has been declining:

  Year        Trailing 12-Month EPS
2018          $3.13
2019          $2.33
2020          $1.65
2021          $1.23
2022          $0.94

Kulicke and Soffa’s trailing 12-month EPS has been declining over the past five years.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills. As you can see below, Kulicke and Soffa’s margin dropped by 10.2 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle.

Kulicke and Soffa’s free cash flow margin for the trailing 12 months was 5%.

  Year        Trailing 12-Month Free Cash Flow Margin
2018           15.4%
2019            7.2%
2020            6.1%
2021            5.3%
2022            5.0%

Kulicke and Soffa’s trailing 12-month free cash flow margin has been declining over the past five years.

Final Judgment

We cheer for all companies solving complex technology issues, but in the case of Kulicke and Soffa, we’ll be cheering from the sidelines. With its shares lagging the market recently, the stock trades at 19.3× forward price-to-earnings (or $37.36 per share). At this valuation, there’s a lot of good news priced in – you can find better investment opportunities elsewhere.

Let us point you toward an all-weather company that owns household favorite Taco Bell. Our research suggests that this company has a strong track record of growth and stability, making it an attractive alternative to Kulicke and Soffa.

Conclusion:

Kulicke & Soffa’s disappointing performance over the past six months and its failure to keep pace with the industry’s overall growth rate are major red flags for investors. With its shares trading at a high valuation and its EPS trending down, we believe that KLIC presents a risk to your portfolio. Instead, consider an all-weather company that owns household favorite Taco Bell, which has a strong track record of growth and stability.