Kulicke & Soffa Industries (KLIC) , an under-the-radar double net that may sound more like a law firm than a leader in wire-bonding equipment, received a letter last week from an unhappy shareholder. While this letter is far from a full-blown activist ploy, it may be the beginning of one.
Breithorn Capital Management, which owns 1.1% of Kulicke & Soffa, is unhappy with the company as well as with the performance of the stock relative to its peers. Its most recent letter to KLIC's board of directors is a follow-up to another one sent last December; it lays out the value case for KLIC and implores the board to hire advisers immediately to help the company explore so-called "strategic alternatives." Breithorn said it believes the company should consider a sale as part of this process
It is not often these days that you find a company such as KLIC, where its cash and short-term marketable securities ($516 million) are more than half of market capitalization ($910 million). That's a total of more than $7 per share in cash and securities for a stock trading below $13. In addition, the company has just $17 million in debt. KLIC is also profitable, trades at 15x next year's consensus earnings estimates, and is generating healthy amounts of free cash flow.
One of Breithorn's biggest concerns and reasons the firm believes KLIC has underperformed is directly related to the pile of cash on the company's books. In the letter, Breithorn states that there is a "pervasive fear" that management either will make an ill-advised acquisition or continue to hoard cash. Neither is an optimal way to unlock value.
Breithorn also said it believes part of the stock's undervaluation is due to limited investor interest for reasons that include limited analyst coverage, lack of investor outreach by management, and the fact that the shares are U.S. listed but the company is headquartered in Singapore.
Given Breithorn's small stake in KLIC, it is unlikely that the firm will move the board into action, but it might be able to persuade other frustrated stakeholders to join the fray.
After seeing three other double-nets acquired this year, and considering the potential opportunity of a company that trades at 1.49x net current asset value, 1.37x tangible book value and has a pile of cash, I've initiated a small position in KLIC.
Short of a company sale, I'd consider a stock repurchase program and the initiation of a dividend a potential win here.
