Kulicke and Soffa has been on fire lately. In the past six months alone, the company’s stock price has rocketed 122%, reaching $107.67 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Kulicke and Soffa, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Kulicke and Soffa Not Exciting?
Despite the momentum, we’re sitting this one out for now. Here are three reasons we avoid KLIC, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Kulicke and Soffa’s demand was weak over the last five years as its sales fell at a 3.9% annual rate. This wasn’t a great result and signals it’s a lower quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, Kulicke and Soffa’s operating margin decreased by 25 percentage points over the last five years. Kulicke and Soffa’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 6.7%.
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 20.2 percentage points over the last five years. This along with its unexciting margin puts 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 breakeven.
Final Judgment
Kulicke and Soffa isn’t a terrible business, but it doesn’t pass our quality test. After the recent rally, the stock trades at 26.6× forward P/E (or $107.67 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. Let us point you toward a dominant aerospace business that has perfected its M&A strategy.
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