ICHR - Ichor Holdings: Expensive With Difficult Quarters Ahead

2023-08-09 21:06:53 ET

Summary

• Ichor Holdings' premium valuation is not justified due to expected disappointing results in the coming quarters.
• ICHR specializes in fluid delivery subsystems for the semiconductor industry, positioning them as a critical player in semiconductor device manufacturing.
• The company's share price reflects market sentiment, and future predictions will depend on the impact of near-term challenges.

Investment Rundown

The premium that investors have to pay for Ichor Holdings Ltd ( ICHR ) right now is quite expensive and I don’t think it's worth it, not when the coming quarters will likely produce quite disappointing results as the market is cooling off from the immense runup it had during both 2021 and 2022.

On August 8 we get the next earnings report from the company but I am quite confident in that going into it there isn't anything to get excited about enough to warrant a buy here. The long-term outlook, however, I have to admit still looks quite good and that means a hold rating here is still advisable.

Company Segments

ICHR is a company that specializes in innovative design, meticulous engineering, and precision manufacturing of fluid delivery subsystems and components, primarily catering to the semiconductor capital equipment industry. This strategic focus positions the company as a critical player in supporting the intricate processes involved in semiconductor device manufacturing. This has lent them a lot of growth over the last few years and the 3-year CAGR for revenues are 19.9%.

At the heart of its offerings are advanced gas and chemical delivery systems and subsystems, which play a pivotal role in the intricate and complex processes necessary for semiconductor device fabrication. These systems are designed to seamlessly integrate into semiconductor capital equipment, contributing to the flawless execution of various stages in the manufacturing cycle.

The semiconductor landscape is characterized by rapid innovation and continuous evolution. Ichor, with its specialized expertise, is uniquely positioned to provide solutions that address the ever-evolving needs of semiconductor manufacturing. By offering fluid delivery subsystems that are finely tuned to the latest advancements in technology, Ichor enhances the capabilities of its clients and contributes to their competitive edge.

As the semiconductor industry continues to push the boundaries of innovation, the role of ICHR remains important. Its expertise in fluid delivery subsystems and components acts as an enabler, driving the precision and reliability required for the successful manufacturing of semiconductor devices.

Valuation

Despite the solid performance so far from ICHR in terms of growing with the market and delivering solid progress within the business the hype around the company has meant the share price has been pushed towards quite unreasonable levels of valuation.

The FWD p/e sits far above where ICHR has been traditionally trading, at a multiple of 14. That is still far below the sector's average of 23 but also indicates that ICHR has a lot to prove in order to be given a higher valuation and premium. The coming years seem to point towards a lot of earnings growth as the memory market remains quite soft still. This is a key market for ICHR to grow in and slowing demand is visible here to hurt both the top and bottom lines. By 2026 the EPS for ICHR is to be $4.5 and with a p/e of 8 if the share price remains the same. Giving ICHR a multiple of 16 which might be possible if the company continues to improve the balance sheet and prove they can retain margins through market cycles, the price target lands on $72. That's around 100% upside. It might seem odd to not rate the company a buy then, but what keeps me on a hold rating is the fact that market downturns like this seem to unproportionate and hurt the earnings of the company. With higher amount of debt leads to higher interest expenses and together with softer demand it creates a difficult situation where revenues decline but operating expenses increase instead. This leads to the poor results for the EPS of the company. I want to see further resilience before getting in.

Risks

Initially, ICHR had provided a forecast back in May indicating a projected YoY decline of 15-20% in its FY2023 revenue. However, the most recent outlook from the company, now encompassing Q3 and Q4 data, paints a bleaker picture, indicating an approximate 37% YoY decrease in revenue for FY2023. This stark revision underscores a more challenging business environment than initially anticipated.

Such a substantial downward adjustment in revenue projections can have far-reaching consequences, extending beyond the company's financial performance to impact investor sentiment and share price dynamics. If further downward revisions occur, the company's share price could likely experience a significant decline. This potential decline would not only represent a hit to the financial positions of current investors but also underscore the heightened volatility and uncertainty surrounding the company's outlook.

Recent Report

We very recently got the last report from the company which showed a beat on both the top and bottom line by a small margin. Revenues came in at $185 million, which is a significant decline from a year ago when it was over $320 million instead.

As for margins, the gross margins landed at 13.5%, which is below the TTM gross margins for the company indicating that perhaps more pain lies ahead as they grapple with shifting demand and higher costs. Cash flows from operations were at $27 million and I think this quarter showcases that ICHR has a lot to rebound back to and unfortunately it doesn't seem to be very quick for them to do so.

In the report, the operating margins came in negative and this ensured that the EPS would be negative for the quarter. What seems to have been a driving factor to the harsh decline in operating margins are the interest expenses the company is paying. The TTM is at $17 million which is the highest in the company's history. This is putting a constraint and as long as interest rates remain high it seems this will persist for both Q3 and Q4 unfortunately. This ultimately leads me to believe there is more pain ahead for ICHR.

Final Words

The share price of ICHR seems to quite well reflect the sentiment in the semiconductor market as it sees demand around the corner after the slump in the last few quarters. Where ICHR has made its statement in the market comes down to making fluid delivery subsystems and components for the industry.

2023 seems to be a down year for the company and the margin retention hasn't been where I want it and that makes me rather rate the company a hold instead of a buy. Until we see a rebound in the market sentiment and this is reflected in coming reports from ICHR I doubt I will be raising my rating of them.

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