Kulicke and Soffa: Momentum is Picking up

Kulicke and Soffa (KLIC) hit a new trading high on rising volume over the last two days (June 16-17, 2008) - 2 1/2 times normal – after Bill Ong from Am Tech Research upgraded the shares. He cited strength in high-end handset and mobile devices units (smart phones like Blackberries (RIMM), Palm Treos (PALM), iPhones (AAPL) and 3G capable handsets).  

The higher end handsets require intense miniaturization in order to pack newer mobile applications into the same small phone space. Thus the nod to KLIC’s new bonder line mentioned in a previous article. Investors who bought then have been able to catch the entirety of this upgrade cycle. Although KLIC has advanced 65% from its March lows, Mr. Ong placed a $10 target on the stock, citing its valuation. The stock continues to have a low P/E (10.66). 

I think the best still lies ahead. This could be a year for the history books for KLIC.  

There are a lot of ifs - which, if they line up - could be stellar. The ongoing price of gold is going to make the new bonders [and the smaller die sizes they interconnect] look really attractive to chipmakers hammered left and right by commodity pricing. 

If the turnaround that's occurring in the memory space "spills over" to the rest of the sector, then any new bonder that cuts costs and enhances productivity will be welcomed. 

The more "customizable" die sets and bonding arrangements made possible with the new machines also have the capacity to grow production for copper-bonding applications; plus there is a new generation of white light LEDS entering the laptop and handset markets that can be turned out on bonders. There is the added possibility that the larger LEDs required for residential, commercial, hotel and landscape lighting will become mainstream in 2008-2009, creating a booming subset for die and wire bonders which are able to produce LEDs by the millions in a short amount of time.  

With the hubbub surrounding alternative energy, it’s a glaring fact that 20% of the electricity consumed in the U.S. goes for lighting. LEDs consume 1/100 of the electricity – and with better color modulation – than the combination of existing incandescent, fluorescent and CFC bulbs. I think incentives will be included in the upcoming National Alternative Energy Act that encourages LED conversion along with the use of solar and windpower. 

And lastly, there is the advent of KLIC’s new die bonder line with some greatly enhanced applications. If it gets favorable reviews, and the bugs are worked out in the testing phase, additional orders (cash $) will come streaming in for both die bonders and ball bonders during 2H’2008 and 1Q’2009. 

Arguably, this has been a very tough correction for chip equip and chip makers, especially the memory makers, but Kulicke and Soffa has come out of trough industry conditions with a profitable balance sheet and a clear mission to de-lever the company in the coming year.  It's a whole new ball game for KLIC. I continue to think a reasonable target is a P/E multiple of 20 with a price of $14. One might say I'm overly bullish, but if this emerging trend continues to be our friend, the facts will speak for themselves. 

 

Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years... In the long term, there is a 100% correlation between the success of the company and the success of its stock.

(Peter Lynch, quoted from Leaders and Success, Investors Business Daily, pg. A3, June 16, 2007).

Comments

[Phil Obal]

Stock has dropped today to 5.51. What is your opinion of the future (3 months and 12 months) from now?