Kulicke and Soffa: Semiconductor Value

04/23/2014 7:00 am EST

Focus: STOCKS

Charles Mizrahi

Editor, Park Avenue Investment Club and Inevitable Wealth Portfolio

Our latest value stock feature is an innovative firm that manufactures capital equipment and expendable tools used to assemble semiconductor devices, explains Charles Mizrahi, editor of Hidden Values Alert.

Kulicke and Soffa Industries (KLIC) is primarily involved in the bonding of wires between an electronic source (printed circuit board) and a small chip (integrated circuit).

KLIC has applied its technology to LED equipment. Its PowerSeries line of equipment allows the firm to conduct its business more efficiently. The development of its ATPremier machine has greatly benefited from robust growth in smartphone shipments.

With applications to nearly every semiconductor chip used in smartphones, greater smartphone demand corresponds to increased demand for the technology. The company is well positioned to benefit off of the continued shift from PCs to mobile phones and tablets.

The company shows strong cash generation. KLIC currently has more than $550 million in cash and equivalents on its balance sheet. It has no short- or long-term debt. Free cash flow (FCF) in the past three years exceeded $430 million.

Strong FCF generation allows the company to allocate capital to R&D and capex. During the last three years, KLIC allocated $190 million to R&D and nearly $50 million to capex.

Gold was the traditional material used to form semiconductor bonds. A rising price of the precious commodity forced companies to adjust. KLIC spearheaded a transition to copper bonding.

Finding a viable alternative to gold was crucial for the company’s ability to maintain a dominant position in the semiconductor industry. It has grown its market share consistently in the bonding market and has emerged as a market leader in the industry.

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