Cash flow is an important indicator of business operation efficiency, and it is more reliable than earnings in terms of valuing a business, as it is less manipulated. Free cash flow is the amount of cash available to the company after all necessary capital expenditures. Thus, I would be quite excited with companies trading at low Price/Free Cash Flow ratio. In addition, if the cash flow was generated without the help of high leverage and it delivered a high return on invested capital, it could be a low risk/high reward opportunity. Here is one company, with the market capitalization of larger than $500 million, that fits those three criteria: Kulicke & Soffa Industries (NASDAQ: KLIC).
Kulicke & Soffa (K&S), incorporated in 1956, is an equipment and expendable tools provider for semiconductor device manufacturers, test providers, and other electronic manufacturers. The majority of its revenue ($727 million) was from the Equipment segment, accounting for nearly 92% of the company's total revenue. In fiscal 2012, around 98.3% of the total sales were to customer locations outside of the US.
Cash Cow with High Return
K&S experienced operating losses in 2008 and 2009 due to the negative impact of the global economic downturn. Its revenue was very low during those two years dropping from $700 million in 2007 to only $328 million in 2008, and to only $225 million in 2009. However, in 2010, sales bounced back to $763 million. Since then, K&S has consistently delivered a high return on invested capital, from 25.62% to 38.76%. In fiscal 2012, the return on invested capital was 26.35%, whereas the return on equity was 28.84%. During the same three-year period, K&S generated consistently positive operating and free cash flow. It generated $182 million in operating cash flow and $161 million in free cash flow in fiscal 2012.
Market Leader in its Products
Interestingly, in the boring semiconductor industry, K&S held the #1 position in many of its product markets, including Wire Bond, Wedge Bond, Stud Bump, and Capillaries. In 2012, it was reported to have 70% of the Wire Bond market. In the company’s recent presentation, it said that the market research forecasted that 83% of all Integrated Circuits would be Wire Bonded in 2016.
Source: K&S Presentation
Cash Cow but Cheaply Valued
To achieve high return on invested capital, K&S employed no leverage at all. As of September 2012, it had $744 million in stockholders’ equity, no debt, and $440 million in cash. Thus, with the total market capitalization of $871.34 million, the enterprise value is much lower, at only $431 million. So the market values K&S at only 2.68x P/FCF. Its EV/EBITDA is also quite low, of 2.17x.
Among its peers, including BE Semiconductor (NASDAQOTH: BESIY) and Teradyne(NYSE: TER), K&S had the lowest valuation among the three. As mentioned above, K&S is valued at 2.17x EV/EBITDA and 5.4x P/E, whereas BE is valued at 4.89x EV/EBITDA and 11.5x P/E. The market is valuing Teradyne at a slightly higher EV multiples, at 5.15x and 10.2x P/E.
Foolish Bottom Line
It is good to see K&S had a market leader position in its Wire Bond product, along with the potential growth of its semiconductor niche. With the debt-free operation, high return on invested capital, low free cash flow, and EV multiples valuation, K&S is definitely a great value pick for investors.