Kulicke & Soffa Industries Inc. (KLIC, Financial) presents a potential opportunity for risk-willing retail value investors. I foresee an average price target in the $50s over the next 12 months.

The GF value for the stock is $80.81 per share. While the company is financially strong and at the forefront of a growing industry, the stock price (at $44.88 on Friday) appears tied to the vagaries of external factors such as the slowing US economy, perceptions of the technology sector, supply chain issues. and lockdowns in Asia.

Either way, the company has a high GF score of 92 out of 100, indicating high outperformance potential. It received high points for momentum, profitability, growth and financial strength, but a medium rank for GF Value.

Assemble the pieces

The Singapore-based company designs, manufactures and sells capital goods and tools used to assemble semiconductor devices.

Its two segments, Capital Equipment and Aftermarket Products and Services (APS), produce advanced displays that have enormous growth potential in the automotive industry and beyond. Automatic offline programming is complemented by KNet PLUS, a new software product. Kulicke & Soffa also services, maintains, repairs and improves equipment.

Kulicke & Soffa is at the forefront of an industry that will lead future global economic growth. The world already works with semiconductors, guiding the functioning of humanity. Semiconductor sales exceeded $468 billion in 2018. They are expected to exceed $613 billion in 2022.

As chip shortages due to supply chain disruptions hit industry sales and the global economy hard in 2019 and 2020, Kulick & Soffa thrived. The demand for its products and services has increased. Additionally, stocks are up 130% over the past five years. They were $23 in September 2020 and rose to $74 over the next 12 months. The price hovered in the mid-$50s the following year as pandemic lockdowns eased but economies stagnated.

Financially strong

Currently, the stock is down 24% in the past year and down more than 30% in the past six months. Kulicke & Soffa is sensitive to the fall in the American gross domestic product. Last quarter’s financials highlighted some of the other reasons for the pullback.

In the second quarter of 2022, which the company announced last May, net revenue increased 13% from the prior year quarter, but fell nearly 17% from the first quarter of the year. Similarly, gross profit, operating profit, net profit and diluted earnings per share increased compared to the second fiscal quarter of 2021, but decreased compared to the first quarter of 2022. Margins were higher in the second quarter than at any time in the recent past. .

I expect the trend to continue until US GDP improves and lockdowns end completely in Asia. The slow economic recovery and fears of a recession are shaking investor confidence.

Kulicke & Soffa will release third quarter earnings data on August 2.

I expect earnings per share to be around $1.60 versus $1.87 last year for the quarter. For the second quarter of 2022, diluted earnings per share increased 55% to $1.95, but down 11% from the prior year quarter.

Reasons to be optimistic

Three attributes underlie my overall optimism for Kulicke & Soffa.

First, the company holds nearly $700 million in cash and cash equivalents. The company earns twice as much profit as the industry and has a higher net income margin of around 28% compared to an industry average of 16%. Insiders hold a relatively large share of the shares at 8.46%.

Second, selling in the $40 range, the stock is trading at 6.8 times earnings. The market for Kulicke & Soffa products is heating up; there is growing pent-up demand for advanced displays, automobiles, home appliances and new products that bode well for the company’s products and services.

Third, management is repurchasing shares and announced a larger and faster buyback program of $150 million, withdrawing 4% of the shares.

Risks

Know that hedge funds sold over half a million shares in the first quarter. The sale of stocks by insiders greatly exceeds their purchases of stocks in 2021 and into 2022. The dividend does not arouse enthusiasm with a forward yield of 1.46%. The payment has been the same for four years.

Another risk for retail investors is that the stock has a high volatility beta rating of 1.43. The stock price goes up and down more than the stock market. Short interest is a whopping 13.7%. The forward P/E ratio is just 6.15 after hitting 8 in February.

Outlook

The outlook for the semiconductor industry is promising. It could grow by 10% per year or more if the economy stabilizes, the pandemic subsides and supply chains return to normal levels. Meanwhile, Kulicke & Soffa’s strength lies in its profitability and conservative management which currently prefers share buyback programs to expansion through mergers and acquisitions or attracting investors with dividend increases. I don’t expect any price dips below $40, but it will be some time before stocks move up impressively.

Additionally, the industry has been filled with mergers and acquisitions over the past few years. Kulicke & Soffa’s small market cap of $2.5 billion could make the company a tasty treat for an industry giant. Thus, institutional investors could push management to seek a sound financial partner that will grow the business and value faster. This potential makes Kulicke & Soffa worthy of the risk.