Kulicke and Soffa Industries, Inc. Should Be On Your Watchlist

Key Points

• Kullicke and Soffa Industries should be on your watchlist. 
• The company's business hit a lull in 2023 but will accelerate in 2024. 
• The balance sheet is a fortress that supports a dividend and share repurchases. 

While headwinds persist for the semiconductor industry, signs within the industry suggest not all is lost for Kulicke and Soffa Industries NASDAQ: KLIC. High inventory and weak demand are plaguing some sections of the semiconductor market, and that is bad news for companies like AMD NASDAQ: AMD, which recently marked down inventory. However, offsetting those weaknesses is high and rising demand for next-gen products to power next-gen technologies like NVIDIA’s NASDAQ: NVDA GeForce RTX series. 

This means for Kullicke and Soffa that there is a demand to sustain the business, and its diversification is helping. Among the company’s customers are Skyworks Solutions NASDAQ: SWKS which supplies Apple NASDAQ: AAPL and Tesla NASDAQ: TSLA, which supplies the world’s leading EVs. The takeaway for investors is the dividend is safe, the company is buying back shares and a rebound is expected in the 2nd half. 

The Analysts Set A High Bar For Kulicke and Soffa Industries

The analysts lowered their estimates for Q2 results after the company lowered its guidance, but they are still setting a high bar. The consensus for revenue is $171.75, about 150 basis points above guidance. Likewise, the $0.27 in EPS is also strong and sets the company up for underperformance when it next reports on May 5th. The full-year outlook isn’t any brighter, with revenue expected to fall double-digits compared to last year, but the weakness isn’t expected to last. Business is expected to accelerate in the 2nd half of the year and lead to growth in 2024. The consensus for 2024 is for revenue growth of 13% and earnings to nearly double on increased leverage. 

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"The near-term macro environment remains dynamic, although we continue to anticipate a period of improving demand in our second fiscal half driven by typical seasonal improvements within higher-volume markets, a larger weighting of advanced packaging and advanced display revenue and an improving book-to-bill ratio,” said CEO Fusen Chen in the Q1 report.

Marketbeat.com only tracks 3 analysts with current coverage, but it is all recent. The oldest came out in February and included a boosted target followed by another target increase and a reiterated Buy-rating. Together the analysts have the stock pegged at Moderate Buy with a price target about 25% above the current action.  The low price target is $55, and even that assumes 10% of upside is available on top of the 1.55% dividend yield. 

The company is a relatively safe dividend payer with a 1.55% yield. The company is paying out less than 45% of its recently-lowered earnings outlook, and the rate will improve next year. This is backed up by a fortress balance sheet allowing share repurchases. The company bought back 1.1 million shares or $45.4 million, worth about 1.6% of the market cap. 

Market Dynamics Favor Higher Prices For KLIC Stock

The sell-side market dynamics favor higher prices for KLIC stock and may even result in a short squeeze. The institutions own 99% of the company and have been buying on balance, while short sellers run their interest up to 16% of the float. Add in a 3% inside interest, and the fuel for a short squeeze is there. The catalyst could be the Q2 results, but it will more likely be the guidance that moves this market sharply in any direction. 

KLIC stock hit bottom last year and has been tending sideways ever since. The bias is upward, but a range exists with the top at $57.50. The market retreated to support at the mid-point of the range and may confirm it over the next few weeks. If so, this market may move higher, but there is a risk in the earnings report. If the market falls below current levels, it could retreat to $40 or lower.