|Shares Out. (in M):||77||P/E||0||0|
|Market Cap (in $M):||1,233||P/FCF||0||0|
|Net Debt (in $M):||-517||EBIT||98||115|
Kulicke and Soffa (K&S) is the market-leading manufacturer of wire bonders, a key piece of equipment in the semiconductor packaging process. It is a cash cow with underappreciated growth prospects that has close to ~45% of its market value ($7/share) in cash, and is only trading at 6.6x EV/TTM EBITDA (profroma recent acquisition). Our forecast calls for $2.75 of cash flow generation over the next eight quarters, resulting in a cash balance of ~$9.25/share in cash or roughly 60% of its current market value, and a 28% increase in EBITDA (combination of organic growth and a small acquisition that closed in January). We think K&S is worth at least ~$23/share, or ~45% upside from the $15.93 it trades at today. In addition to a large cash buffer, strong cash flow, and attractive growth prospects, there’s also a “free option” from their new line of thermo-compression bonders (TCB) currently in beta testing with potential clients. We’re not currently modeling any sales for this new segment, but it has the potential to add significantly to profitability starting in 2016, and if it does, K&S will be worth much more than our $23/share target.
K&S has been written up on VIC before, and we refer you to those write-ups for additional background.
THE WIRE BONDING “CASH COW” BUSINESS
People have been saying wire bonding (ball, wedge and stud-bump bonding) is an outdated technology and should start to decline for years – ever since flip chip technologies were introduced decades ago. However, while flip chip and other advanced packaging technologies have grown faster than wire bonding, wire bonders have continued to get better and cheaper, and wire bonding has continued to grow as well. The installed base of wire bonders has grown from 80k machines to ~130k over the past 5 years, and wire bonding continues to be how the majority of integrated circuits are connected. This trend is expected to continue, and literally every one of the 25+ industry consultants, wire bonding experts, wire bonder manufacturer employees, and wire bonder purchaser employees we spoke to said they expect wire bonder sales to continue to grow in the low – mid single digits going forward. One analyst at a leading consulting firm said it well; “Wire bonding is the freaking energizer bunny, it just keeps going and going, and won’t be stopping any time soon”.
However K&S is priced like wire bonding is a declining market, not the increasingly stable and growing cash cow market that it is. Based on our research, here are our forecasts for K&S’s WB sales over the next few years.
Wire bonding has and will continue to grow because packaging is primarily about cost, and wire bonding continues to be the lowest cost packaging option for the vast majority of package types. It’s also highly flexible, and can be used on a variety of IC packages where flip chip is just not possible or is too expensive. So while flip chip and other technologies are gaining market share mainly in use cases that require small packaging, wire bonding is still used for the bulk of interconnections. The picture below illustrates this – even in a high-end smartphone wire bonders are still used to connect a number of the components.