By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Earnings report and shareholder’s involvement
Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) reported today FY 2014 second quarter results. Stock reacted positively and opened up by about 4%. According to Bruno Guilmart, company’s President and CEO, revenue was in mid-range of previously provided guidance. Looking forward, Bruno Guilmart commented, “We have experienced strengthening demand in the majority of served markets and expect this trend to continue throughout the June quarter. We look ahead with great optimism as we continue to actively enhance our core market positions, expand in adjacent areas through organic development and pursue meaningful external growth opportunities.” On April 22nd, Lemelson Capital Management LLC disclosed a stake in company’s shares and sent a letter to management in which it expressed its view that company’s shares are greatly undervalued, and its huge cash pile should be used to return capital to shareholders.
Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) is a global leader in the design and manufacture of semiconductor and LED assembly equipment. As a pioneer in this industry, K&S has provided customers with market leading packaging solutions for decades. In recent years, K&S has expanded its product offerings through strategic acquisitions, adding wedge bonding and a broader range of expendable tools to its core ball bonding products. Combined with its extensive expertise in process technology, K&S is well positioned to help customers meet the challenges of assembling the next-generation semiconductor and LED devices.
Cash and potential for buyback, tender offer or a special dividend
Company had $596 million in cash and equivalents and no debt, based on a latest quarterly earnings release. This amount represented 62% of company’s recent market capitalization. During three year period between 2011 and 2013 Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) did not repurchased any shares and the company does not pay dividends. Large amount of cash on the balance sheet might be used by company for acquisitions and this is one of the reasons investors discount to some degree the value of cash and, in effect, the value of the company. Nevertheless, it is reasonable to assume that the company will return at least some part of this cash pile to shareholders. One of the company’s hareholders, Lemelson Capital Management LLC, recently pressed for a buyback of at least $250 million dollars. Such buyback would provide a yield of about 26%.
Kulicke and Soffa’s current valuation
Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) Industries’ market capitalization was $965 million as of April 28th, 2014. Company is valued at an EV/EBITDA multiple of x4.4 (FY 2013). If one looks at a three year period (FY 2011 – FY 2013), company generated an average EBITDA of $156 million, making the current valuation look extremely low: an EV/EBITDA multiple of only x2.4. Free Cash Flow was also attractive: $77 million in FY 2013 and an average of $149 million over three year period, which represents a FCF Yield of 8% and 15%, respectively. Without accounting for a large cash holding, the FCF Yield is especially attractive: 21% in FY 2013 and 40% during the last three years (average). Despite the uncertainties surrounding the future use of cash holding, it seems that current valuation provides the investor with a meaningful margin of safety.