My Biggest Holding Gaining More Value Through Massive Buybacks | Kulicke & Soffa Industries

The market remained very volatile in the last weeks. Warren Buffet is buying a lot of stocks, which means there must be some opportunities in the market right now Big swings up and down seem to be the new normal. These periods present the best opportunities, now is the time that you want to take a deep dive into stocks and look for the hidden gems. In this video I might discuss the gem that you were looking for.

Today, we will discuss the Q2 results of Kulicke & Soffa Industries $KLIC. KLIC beat earnings and revenue estimates in their latest quarter while global challenges are limiting industry growth. Nonetheless KLIC is confident in their business and bought back almost 3 million shares.

Kulicke & Soffa Industries is my largest holding, with a weighting of 18%. So, you can say my conviction in this stock is rather high. The most important reasons for this are the low valuation, the high profitability and the strong balance sheet which allows for buybacks and dividends. We can also see these points back in their latest quarter.

KLIC reported revenue of 384 million dollars and net income of 116 million dollars. A 13% growth rate year over year on revenue basis. But what is much more remarkable is the 62% net income growth year over year. This means the company has increased their profitability and efficiency by a great margin. Earnings per share increased even more due to buybacks. Less shares outstanding gives you more earnings per share. The shares that you own get more value.

If we compare the results with last quarter, we can see that even when revenue decreased, they still increased their gross margins and operating margins. KLIC is working extremely hard in getting more income on their revenue.

KLIC ended the quarter with almost 700 million dollars in cash and cash equivalents, which represents 22% of their current market cap. The company is loaded with cash, this makes is possible to invest in growth initiatives, pay out dividends and do buybacks. And that is what they do. KLIC bought back 2.9 million shares worth around 146 million dollars. 146 million dollars is equal to 4.7% value creation, on top of that they also paid around a 0.3% dividend this quarter. So, you gained in total 5% shareholder value in 3 months, not bad right? KLIC has still 340 million dollars left to do buybacks under their buyback program, which represents another 10% value. They will opportunistically execute on this.

By looking in the 10-Q SEC filing, we can find the sales overview by segment. The aftermarket products and services or APS had small growth year over year. The capital equipment segment showed enormous growth year over year. Inside the capital equipment segment we find general semiconductor, automotive, LED and memory. We got two outstanding growth drivers, the automotive and the memory business. Soon these might even catch up to the main business, which is still the general semiconductor. The LED business was lagging a bit behind last quarter, but two new orders came in for KLIC’s latest LED equipment Luminex.

In the balance sheet we can see an increase in inventory. This is due to higher manufacturing activities in anticipation of higher demand in the following periods. In the 10-Q, you can find that they increased all 3 parts of the inventory: raw materials, work in process and finished goods. We can also see that the management team has decided to do more and more buybacks as they feel like the stock is currently undervalued. A decrease in shares outstanding means the company must pay less dividend. The dividend did increase in Q1 by 21%.

KLIC’s business is still showing a lot of strength and has the tools to keep it growing overtime. Now the question is: how much are we paying for the stock? The current price to earnings is only 6.4 compared to the sector median of 24. The company is also earning a lot of free cash flow, which makes it possible to pay down debt, invest in the business, pay out dividends or do buybacks. The price to cash flow is 7.8. From these metrics we can conclude that Kulicke and Soffa industries is not so expensive right now.

The company is extremely efficient in what they do. Their 5-year average net income margin is higher than the current net income margin of the sector. If we only check out the current net income margin of KLIC we can see that they are performing 4 times better than the sector. The capital allocation of the company is also exceptional strong and is outperforming competitors.

Lately I have not been adding a lot of shares, since it already is my top holding. The stock price is also very close to my average buying price. I do remain very bullish on the company and I expect it to keep performing well based on past performance, the healthy balance sheet and the strong industry growth ahead.

A lazy reader? Check out my video now: My Biggest Holding Gaining More Value Through Massive Buybacks | Kulicke & Soffa Industries - YouTube

DISCLAIMER: I do own shares of Kulicke & Soffa Industries. I am not a financial advisor. Investing is your own responsibility. I am not accountable for any of your losses.