Kulicke and Soffa: Trend Leaves Little Second-Guessing As To What To Do (NASDAQ:KLIC)

Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) has been slowing down for a while as a supplier of semiconductor, LED and packaging solutions, but earnings have managed to stay fairly resilient nonetheless. That is, until the most recent quarterly guidance, which calls for a large drop in the top and the bottom line. In addition, demand is expected to remain soft for at least a couple of quarters due to circumstances that may be around for a while. All of this has weighed on the stock, leaving little choice as to what to do with KLIC. Why will be covered next.

The charts seem to have a clear opinion as to KLIC

It’s no secret that KLIC has been slowing down in FY2022, quite unlike the year before. KLIC ended FY2021 on a high note in Q4, putting the finishing touches on what was a year for the record books with revenue growing by as much as 143.5% YoY to $1,517.6M and non-GAAP EPS by a whopping 546.3% YoY to $6.14. However, growth has slowed down since then, which is essentially what KLIC predicted would happen at the 2021 Investor Day almost one year ago.

The bears seem to have loved what KLIC had to say, because short interest soared in the aftermath of the 2021 Investor Day. It has remained elevated ever since. Short interest is 3-4 times what it was in September 2021 at 7M, which corresponds to 12-13% of the stock float. The rise in short interest starting in September 2021 coincided with a decline in the stock which has yet to reach an end.

The chart above shows how the stock has lost 31% of its value YTD. In fact, the stock appears to be stuck in what looks like a descending channel, a bearish chart pattern. The channel is formed by an upper trendline and a lower trendline running parallel to each other. The latter is formed by a series of lower lows and the former is formed by a series of lower highs. As long as the stock stays within the channel, the stock is heading lower.

It’s not always clear in which direction a stock is heading, but in the case of KLIC, the trend seems to be very much down based on current chart patterns. It’s not impossible to break out of a channel, but the odds favor lower stock prices. If there are people out there in doubt as to what to do with KLIC, then one look at the charts should go a long way towards finding the answer.

What is weighing on KLIC

The rise in short interest and the decline in the stock can both be traced back to comments made at the 2021 Investor Day. Management made it clear the very fast pace of growth at that time would not be sustained. However, not only has earnings growth fallen flat in recent quarters, it is about to fall off a cliff if the latest guidance is any indication. The table below shows the numbers for Q3 FY2022.

Q3 revenue declined by 3.2% QoQ and 12.3% YoY to $372.1M, the third consecutive sequential decline in quarterly revenue. On the other hand, the bottom line still managed to squeeze out some growth despite the drop in the top line. GAAP EPS increased by 7% QoQ and 11.2% YoY to $1.99 and non-GAAP EPS increased by 7.2% QoQ and 11.8% YoY to $2.09. Note that both the top and the bottom line surpassed expectations.

The increase in the bottom line was in part due to higher margins, which in turn were mostly the result of a better product mix. However, share buybacks also assisted EPS growth. KLIC has stepped up the pace in recent quarters and the results are there to see. The GAAP-weighted average number of shares outstanding reached 59.96M in Q3 FY2022, down from 63.49M in Q3 FY2021.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2021	QoQ	YoY
Revenue	$372.137M	$384.282M	$424.318M	(3.2%)	(12.3%)
Gross margin	51.2%	52.5%	46.1%	(130bps)	510bps
Operating margin	32.8%	33.7%	28.4%	(90bps)	440bps
Income from operations	$122.077M	$129.341M	$120.455M	(5.6%)	1.3%
Net income	$119.034M	$116.001M	$113.766M	2.6%	4.6%
EPS	$1.99	$1.86	$1.79	7.0%	11.2%
(Non-GAAP)
Operating margin	34.7%	35.2%	29.7%	(50bps)	500bps
Income from operations	$128.997M	$135.188M	$125.935M	(4.6%)	2.5%
Net income	$125.089M	$121.463M	$118.786M	3.0%	5.3%
EPS	$2.09	$1.95	$1.87	7.2%	11.8%

Click to enlarge

Source: KLIC

The top line has declined and the bottom line has fallen flat in the last three quarters, but it was the near-term outlook that stole the show. The outlook sees the numbers getting worse in a hurry. Guidance calls for FY2022 to end on a weak note, with Q4 revenue of $260-300M, a decline of 24.8% QoQ and 42.3% YoY at the midpoint. The forecast expects non-GAAP EPS of $0.93, plus or minus 10%, a decline of 55.5% QoQ and 57.1% YoY at the midpoint.

(Non-GAAP)	Q4 FY2022 (guidance)	Q4 FY2021	YoY (midpoint)
Revenue	$260-300M	$485.3M	(42.3%)
EPS	$0.93 +/- 10%	$2.17	(57.1%)

Click to enlarge

With the latest guidance, FY2022 revenue is projected to end up at $1,477-1,517M, a decline of 1.3% YoY at the midpoint. FY2022 non-GAAP EPS is projected to end up at $7.16, an increase of 16.2% YoY at the midpoint. In comparison, revenue was $1,517.6M and non-GAAP EPS was $6.14 in FY2021. While these numbers don’t look all that bad, the trend is for the numbers to get worse. The numbers for the whole year benefited from strong results earlier in the year. Non-GAAP EPS, for instance, was a record $2.19 in Q1, but it is expected to fall to just $0.93 in Q4.

The latest guidance was much worse than expected, resulting in a drastic lowering of future earnings expectations. The consensus estimates still call for revenue of $1,500M and non-GAAP EPS of $7.16-7.51 in FY2022, but this is expected to drop to $990-1,280M and $3.60-4.65 in FY2023. Keep in mind that at the 2021 Investor Day, KLIC predicted revenue in FY2022 and FY2023 would stay flat compared to FY2021. The latest guidance suggests KLIC will be hard-pressed to stay true to its predictions.

Earnings call leaves question marks in the air

It’s true Q4 tends to be negatively affected by seasonality, but the weak guidance was nevertheless a surprise. Management, therefore, added some color as to the reasoning behind the deterioration in the numbers. KLIC believes demand in the entire industry is being affected by a deterioration in the global economy, which leaves the possibility that weakness could be around for a whole. On the other hand, it’s worth mentioning that management is optimistic that the coming soft patch will only last 2-3 quarters. Demand is expected to improve in the second half of next year.

From the Q3 earnings call:

“So actually, I don’t think is a seasonality issue. I think what we are facing is the whole industry. The customer demand actually is impacted by global macro issue, right? You can see from a lot of customer products actually; this slowdown looks like it’s quite dramatic in the recent months. So it might not be seasonality. I think it’s softness capacity projection to actually to the effect on this demand issue. And we do believe this probably would last about 2 quarters and maximum 3 quarters. And second half, we expect in the market should pick up globally for the whole industry.”

A transcript of the Q3 FY2022 earnings call can be found here.

KLIC has its attractions

The charts are decidedly bearish and earnings appear about to fall off a cliff, but KLIC has some trump cards left. KLIC is working on expanding its product portfolio in order to expand the markets it can serve, which could drive growth in the future. Advanced packaging is one example where growth prospects are very good.

However, if KLIC is drawing interest in today’s market, it’s probably due to valuations. The table below shows some of the multiples KLIC trades at. For instance, KLIC earned $8.05 in the last twelve months in terms of GAAP. As a result, KLIC trades at 6 times forward earnings with a trailing P/E of 5. EV/EBIT is just 3-4.

However, while these multiples seem low, they could change very quickly if earnings deteriorate the way some expect them to. The outsized earnings per share in recent quarters have left their imprint on valuations, but they are more like the exception than the norm. FY2021 GAAP EPS multiplied by seven times from $0.83 in FY2020 to $5.78. It’s not out of the question that future earnings could be closer to that of FY2020 than to FY2021. Multiples would look very differently if this were the case.

	KLIC
Market cap	$2.41B
Enterprise value	$1.71B
Revenue (“ttm”)	$1,702.6M
EBIT	$559.1M
Trailing P/E	5.16
Forward P/E	6.02
PEG ratio	0.05
P/S	1.49
P/B	2.01
EV/sales	1.00
Trailing EV/EBIT	3.05
Forward EV/EBIT	3.48

Click to enlarge

Source: Seeking Alpha

Investor takeaways

I used to be bullish on KLIC, but I am currently neutral on KLIC in light of all the changes in the last 12 months. An argument can be made to be long since KLIC looks cheap with multiples where they are. Earnings have held up despite the decline in revenue. KLIC has, after all, earned over $8 on a TTM basis, giving KLIC a P/E ratio in the mid single digits. While the company is heading towards a soft patch in terms of demand, management believes demand will recover after 2-3 quarters.

However, an extended downturn is possible if, for instance, chip demand declines along with a worsening global economy and companies decide to pull back on spending on related manufacturing equipment due to weak demand. It’s true earnings have been very strong in FY2021-FY2022, but history shows that these numbers are very much the exception rather than the norm. Odds are future earnings will not resemble those in FY2021-FY2022, but something much less.

KLIC only earned $0.83 as recently as FY2020 and just $0.18 the year before. If earnings in the coming fiscals come closer to resembling the numbers in FY2019-FY2020 than FY2021-FY2022, P/E ratios that may appear to be low right now would shoot up. KLIC is assigned a P/E of 5 with EPS of $8, but P/E would be more like 40 with EPS of say $1.

The stock has declined all year, but could very well keep declining, depending on what happens on the earnings front. It’s not clear how bad it could get for KLIC in terms of earnings. History suggests earnings could be a lot worse than they are right now. It’s not a coincidence that the stock is heading lower in a descending channel. As bad as things appear to be, they could get a lot worse.

Bottom line, there is a saying that the trend is your friend and the charts leave no doubt as to what the current trend is. The trend is also unlikely to change in the near term with earnings expected to dip in the upcoming quarters. KLIC may be better off in the future and there may come a time when it is time to be long once again, but now is not that time. The stock is trending lower, and as long as this remains the case, there can be little second guessing that standing on the sidelines is the way to go.