Ichor Stock: Beyond The Horizon That Matters Most (NASDAQ:ICHR)

Ichor Holdings (NASDAQ:ICHR) released its latest projections when it held its latest Investor Presentation on August 22. ICHR, for instance, expects FY2022 to end up as a record-setting year when all is said and done. However, the upbeat near-term outlook notwithstanding, there are other concerns out there that may give people pause when it comes to ICHR. Why will be covered next.

What ICHR had to say in its latest presentation

The latest presentation included a bunch of numbers that represent the outlook as ICHR sees it, including how much has been achieved in the last several years. For instance, the wafer fab equipment or WFE market is projected to grow to a record $95B in FY2022, an increase of about 9% compared to FY2021 when the market grew 45% YoY to $87B, making it the third consecutive year of growth. In comparison, the WFE market totaled just $51B in FY2019, the last year the WFE market shrank YoY.

ICHR itself expects to grow twice as fast as the WFE market. FY2022 projections call for record revenue of $1,315M, up from $1,097M in FY2021. This translates to a growth rate of about 20% YoY, which is less than the 47% in FY2021. In comparison, revenue was just $621M in FY2019, the last year revenue declined YoY. No specific numbers were given for FY2022 earnings, but ICHR did state that non-GAAP earnings are set to exceed last year’s $3.37 to set a new record high.

In a nutshell, business has never been better according to the presentation. Sales and profits are reaching record highs in FY2022, as is the WFE market itself. Note that the FY2022 projections include contributions from the acquisition of IMG. ICHR paid $270M to acquire IMG, which is expected to contribute $70-80M to the top line and $0.32-0.38 to be bottom line in FY2022.

A recovery made the latest FY2022 projections possible

The latest projections would not have been possible if ICHR had not recovered after getting off to a slow start in Q1, in part due to supply chain disruptions. A previous article covers this in greater detail. In fact, ICHR beat expectations for the top and the bottom line. Q2 revenue increased by 16.7% YoY to a record $329.6M. Non-GAAP gross margin improved to 17%. Non-GAAP EPS was much better than expected by surpassing the top end of guidance to a record $0.98, an increase of 8.9% YoY. Note that tax rates were lower than expected in Q2, which boosted earnings.

On the other hand, GAAP EPS declined by 6.3% YoY to $0.74. Keep in mind that Q1 FY2022 earnings, non-GAAP and GAAP in particular, were negatively impacted by one-time losses related to a settlement and fair value adjustments related to acquisitions, skewing the QoQ comparisons. An increase in operating expenses drove the decrease in operating margins. The table below shows the numbers for Q2 FY2022.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Net sales	$329.560M	$293.146M	$282.308M	12.42%	16.74%
Gross margin	16.8%	15.0%	16.8%	180bps	–
Operating margin	7.5%	3.6%	8.9%	390bps	(140bps)
Operating income	$24.796M	$10.465M	$25.215M	136.94%	(1.66%)
Net income	$21.537M	$8.039M	$22.865M	167.91%	(5.81%)
EPS	$0.74	$0.28	$0.79	164.29%	(6.33%)
(Non-GAAP)
Net sales	$329.560M	$293.146M	$282.308M	12.42%	16.74%
Gross margin	17.0%	16.0%	16.8%	100bps	20bps
Operating margin	10.0%	8.4%	11.2%	160bps	(120bps)
Operating income	$32.981M	$24.578M	$31.568M	34.19%	4.48%
Net income	$28.326M	$20.178M	$26.307M	40.38%	7.67%
EPS	$0.98	$0.70	$0.90	40.00%	8.89%

Click to enlarge

Source: ICHR

Guidance calls for Q3 FY2022 revenue of $320-360M, an increase of 29.3% YoY at the midpoint. The forecast expects GAAP EPS of $0.63-0.89, an increase of 18.8% YoY at the midpoint, and non-GAAP EPS of $0.85-1.11, an increase of 21% YoY at the midpoint. In addition, while guidance did not extend beyond Q3, ICHR does expect a sequential increase in revenue, margins and earnings in Q4.

(GAAP)	Q3 FY2022 (guidance)	Q3 FY2021	YoY (midpoint)
Revenue	$320-360M	$262.9M	29.33%
EPS	$0.63-0.89	$0.64	18.75%
(Non-GAAP)
Revenue	$320-360M	$262.9M	29.33%
EPS	$0.85-1.11	$0.81	20.99%

Click to enlarge

ICHR is fairly valued

Earnings are on the rise and business has arguably never been better. In addition, ICHR can be had at not too great a cost. The table below shows the multiples ICHR trades at. For instance, ICHR has an enterprise value of $1.25B, equal to 11 times EBITDA on a trailing basis and 9 times EBITDA on a forward basis.

On the other hand, ICHR has its weaknesses. EBITDA margins, for instance, are on the low side at around 10%. The balance sheet also needs some work. Cash, for instance, is in relatively short supply at ICHR with cash and cash equivalents of just $46M as of Q2. In contrast, ICHR has a lot more debt to service at around $340M. Keep in mind that ICHR used cash to make acquisitions.

	ICHR
Market cap	$957.03M
Enterprise value	$1.25B
Revenue (“ttm”)	$1,172.7M
EBITDA	$117.6M
Trailing P/E	15.34
Forward P/E	13.02
PEG ratio	N/A
P/S	0.81
P/B	1.78
EV/sales	1.07
Trailing EV/EBITDA	10.64
Forward EV/EBITDA	8.75

Click to enlarge

Source: SeekingAlpha

Some problems have receded, but other problems may be lurking out there

ICHR got off to a disappointing start in Q1, but the Q2 results and the expected ones in Q3 put it back on track to achieving a record-setting year in FY2022. Supply chain disruptions played a major role in holding back ICHR and an easing in these disruptions have put ICHR in a position to get better. From the Q2 earnings call:

“After several quarters of supply chain challenges that limited the industry’s availability of components and appreciably constrained our output, we were pleased to see several areas of improvement in Q2. These improvements, along with strong operational execution and improving factory efficiencies enabled us to achieve record output and very strong financial results.”

A transcript of the Q2 FY2022 earnings call can be found here.

However, while ICHR has yet to be impacted, management acknowledges there may be other problems on the horizon for ICHR.

“Compared to a quarter ago, concerns about the sustainability of these unprecedented levels of wafer fab equipment spending have increased. A number of reports since our last call have indicated a slowdown in consumer-driven segments of the semiconductor industry, declining memory prices and an inventory correction, all ahead of an expected recession.”

There is a noticeable slowdown in certain segments of the semiconductor market. The slowdown in demand was initially confined to such items as PCs and smartphones, but according to the CEO of Micron (MU), the slowdown in demand is starting to spread to other segments like datacenters and automotive.

“At this time, we are not seeing any pushouts of demand. Therefore, even though we have not experienced any changes in customer demand so far, we have a variable operating model and can quickly adjust.”

A growing number of companies have lowered their earnings outlook due to weakening demand. Some, like MU, have decided to cut back on capex spending. If more and more companies decide to reduce their investments in new fab capacity, less equipment will be needed from WFE suppliers like Applied Materials (AMAT) and Lam Research (LRCX). This will impact ICHR as a supplier to leading WFE suppliers like AMAT and LRCX, especially with the latter accounting for 53% and the former 32% of ICHR’s FY2021 revenue, according to the most recent annual report.

ICHR may be changing course once again

The chart below shows how the stock has done much better in the last two months. The stock was trending lower earlier in the year until the start of July when the stock bounced. The bounce was supported by several tailwinds. For instance, the stock market rallied after being oversold in June, pulling many stocks along, ICHR included.

The most recent earnings report helped, especially guidance that was better than expected. Another factor supporting the rally was the passing of the CHIPS and Science Act, which promises to direct funds towards increased semiconductor manufacturing in the U.S., something WFE suppliers should be pleased to hear.

However, the bounce seems to have lost steam. The stock has come a long way in the last two months and resistance seems to be in the way. Longs may want to think about taking some chips off the table after the rally in the last two months. The stock looks tired and probably needs a breather. A move down after the huge move up would not be so unusual.

Investor takeaways

If we were to go strictly by the quarterly numbers, then ICHR is in great shape. Sales and profits are likely to reach new record highs in FY2022 on the back of a huge expansion in the WFE market that is now in its third year. It’s tempting to be long ICHR with all this in mind, especially with how the stock has performed in recent months.

The long-term outlook also looks favorable. The trend toward increasingly complex process nodes remains firmly in place. With complexity going up with every node transition, so too does etch and deposition intensity. ICHR as a leading provider of critical fluid delivery subsystems should benefit from growing opportunities and increased fluid delivery content.

However, while ICHR has yet to see an impact, the slowdown in semiconductor demand is a cause for concern. Companies are adding new fabs and equipment based on the assumption that the newly added capacity will be utilized, but this assumption in increasingly being challenged with more and more companies encountering falling demand for semiconductors.

I am neutral on ICHR. In the very short term, ICHR is likely to set new quarterly highs for the top and the bottom line. ICHR will also benefit from new fabs that are likely to be built in the U.S., which could extend the current expansion in the WFE market. But it is likely only a matter of when and not if before the WFE market starts to contract.

The WFE market has come close to doubling in size in just the last three years, far faster than in previous years. It’s difficult to see how this pace can be sustained or how the record amount of new fabs and related equipment being added worldwide will not eventually result in a glut in the semiconductor market. There are already signs demand is falling and that’s before most of the fabs on the drawing board have come online.

The charts suggest the stock is due for a correction after the move off of the July lows. The stock appreciated by as much as 66% in two months, but it’s having a hard time staying airborne in recent days. While a move lower is not guaranteed, it’s the more likely direction with the way the charts are laid out. Taking at least some chips off the table is warranted under the circumstances.

Bottom line, ICHR looks in good shape, but looks can be deceiving. ICHR is doing fine at the moment as shown by the latest guidance, but there are increasingly clouds on the horizon. The market for semiconductor equipment is highly cyclical and it looks like it is at or maybe even past the peak in the current cycle. To go long an equipment supplier like ICHR at this stage of the cycle is likely not a good move.