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Why Ichor Sell-off Presents A Great Opportunity?


Shares of semiconductor-equipment maker Ichor Holdings, Ltd. (ICHR) look attractive at current levels. We reiterate our positive outlook on the shares of ICHR and urge investors to take advantage of the weakness in the stock, as we believe that the shares have at least 30% upside from here.

The stock has declined 21% from its July 31 closing price of $22.98, after announcing in-line earnings for the second quarter on August 1. We think this is an overreaction. The company did forecast better-than-expected earnings and revenues for the third quarter.

For the third quarter, Ichor expects adjusted earnings of $0.59-$0.65 per share on revenues of $160-$170 million, including contribution from Cal-Weld, its recent acquisition announced in late July. Analysts were modeling earnings of 50 cents a share on revenues of $142.1 million. Now, the consensus estimate has been revised to earnings of $0.62 per share on revenues of $165.07 million to stay in tune with the company's guidance.

Late July, the semiconductor-equipment maker announced the $50 million acquisition of Cal-Weld, Inc., engaged in the design and fabrication of precision high purity and industrial components, sub-systems and systems. Ichor expects Cal-Weld to generate revenues of $15-$20 million and earnings of 7 to 10 cents per share, in the last two months of the third quarter, during which Ichor will own Cal-Weld. On an annual basis based on current industry activity levels, Ichor expects Cal-Weld to generate between $65 million and $80 million of revenue and $0.29 to $0.39 of non-GAAP adjusted EPS.

For the recently-ended second quarter, Ichor reported revenues of $159.7 million vs. year-ago $95.4 million vs. $148.7 million in the previous quarter. GAAP earnings per share was $0.38 vs. year-ago $0.02, vs. $0.50 in the previous quarter. Adjusted EPS was $0.6 vs. year-ago $0.29 and $0.57 in the previous quarter.

Ichor supplies gas panel delivery systems and chemical delivery subsystems for the semiconductor capital equipment industry. The semiconductor supply chain depends on critical subsystems, which is Ichor's domain of expertise.

New semiconductor processes, like Multiple Patterning, FinFET, 3D NAND and Advanced packaging require more fluid delivery. Ichor says its platforms are critical to etch, Chemical Mechanical Planarization (CMP) and deposition steps that support these technology inflections.

Citing a Gartner report, Ichor said in a May investor presentation that key processes with fluid delivery were growing faster than the overall Wafer Fab Equipment (WFE) market. While total WFE is expected to grow at an 8% CAGR (Compound Annual Growth Rate) from $28.99 billion in 2013 to $42.43 billion in 2018, Gas delivery processes -- Dry Etch and CVD or Chemical Vapour Deposition --are expected to grow at a CAGR of 17% and 14%, respectively.

Last year, Ichor acquired Ajax Custom Manufacturing of Union City, a plastic component supplier to major customers in the semiconductor capital equipment market. At the time, Ichor said the addition of Ajax will give it a great foundation for continued growth in semiconductor plastics, while opening up the opportunity for pursuing additional opportunities in liquid delivery processes.

Ichor sees the opportunity for market share gain in the chemical delivery systems market with new chemical delivery capabilities. The CMP chemical delivery process is expected to grow at a CAGR of 14% from 2013 to 2018, also outpacing the growth in the WFE market.

The company's revenue growth has surpassed its customers and key competitor Ultra Clean Holdings Inc. (UCTT). From 2013 to 2016, Ichor has grown revenues at a CAGR of 23%, vs. 10% growth for customers and 8% growth for UCTT.

From $249 million in 2014, Ichor has grown revenues to $291 million in 2015 and $406 million in 2016, representing a 28% CAGR. But, during the same period adjusted Net income has grown at a whopping 64% CAGR, from $11.7 million in 2014 to $20.2 million in 2015 and $31.6 million in 2016.

Yet another definite plus is Ichor's ability to scale its business and respond efficiently to increases in demand, as customers expand with acquisitions.

The company says its low capex requirements and variable cost structure constitute a capital efficient, and leveraged earnings business model, respectively. Capex has declined from 1.4% of revenues in 2014 to 0.5% in 2015 and 1.1% in 2016, while GAAP operating expenses have declined from 13.2% of revenues in 2014 to 12.4% in 2015 and 10.2% in 2016.

We continue to believe in the Ichor growth story, as we think the fundamentals remain intact. we think the sell-off is temporary and the stock will grow into its potential.

by RTTNews Staff Writer

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