Kulicke and Soffa currently trades at $37.36 per share and has shown little upside over the past six months, posting a small loss of 3.5%. The stock also fell short of the S&P 500’s 5.2% gain during that period.
Is there a buying opportunity in Kulicke and Soffa, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
We're cautious about Kulicke and Soffa. Here are three reasons why you should be careful with KLIC and a stock we'd rather own.
Why Do We Think Kulicke and Soffa Will Underperform?
Headquartered in Singapore, Kulicke & Soffa (NASDAQ: KLIC) is a provider of production equipment and tools used to assemble semiconductor devices
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Kulicke and Soffa’s sales grew at a tepid 5.9% compounded annual growth rate over the last five years. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Kulicke and Soffa, its EPS declined by 28.3% annually over the last five years while its revenue grew by 5.9%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Kulicke and Soffa’s margin dropped by 10.2 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle. Kulicke and Soffa’s free cash flow margin for the trailing 12 months was 5%.
Final Judgment
We cheer for all companies solving complex technology issues, but in the case of Kulicke and Soffa, we’ll be cheering from the sidelines. With its shares lagging the market recently, the stock trades at 19.3× forward price-to-earnings (or $37.36 per share). At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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