ICHR - Ichor Holdings: Rallied For Perhaps Not The Right Reason

2024-01-10 16:20:48 ET

Summary

• ICHR put together an impressive rally to end 2023, which put it into positive territory, but a closer look takes much if not all of the shine away.
• The rally may have overshadowed the challenges facing ICHR, including disappointing earnings in the latest report, but that does not mean they have gone away.
• A look at past trading patterns the stock has stuck to suggests there are a couple of points worth taking into account.
• ICHR may not be warranted as an investment at this time, but it could be worth considering as a trade for the short term.

Ichor Holdings ( ICHR ) has been pretty hot lately. The stock has appreciated by close to half in the last couple of months. This after hitting a 52-weeks low on November 9 in the wake of a disappointing earnings report that missed EPS estimates. However, while the stock has turned it around in a big way, the rally may not be so impressive upon closer look and probably not worth buying. Why will be covered next.

Why the rally is not as impressive as it appears at first

A previous article from last October rated ICHR a hold after noting how the stock had essentially traded sideways due to being hemmed in between support and resistance. In addition, the article mentioned how the November report could turn out to be a catalyst for the stock in light of important customers suggesting changes in demand, which could alter the outlook for ICHR.

As it turned out, the stock fell 11.1% to new lows on November 6 after ICHR came up short with its Q3 report. ICHR saw its stock gain 26.4% in 2023, but as recently as November 9 ICHR was down big with a loss of 17% for the year when the stock hit a 52-weeks low of $22.26. However, change came soon after. A rally followed, which culminated in the stock reaching $34.90 on December 27, a gain of 56.8% in less than two months to end the year on a positive note as shown in the chart below.

On the other hand, it’s worth mentioning that ICHR is not unfamiliar with these kinds of large moves. Notice how in the chart above the stock went on a decline that took the stock from a high of $37.10 on September 1 to a low of $22.26 on November 9, a decline of 40% in slightly more than two months. This selloff preceded the aforementioned rally in the stock, both being almost similar in magnitude.

Going back further in time shows similar outsized moves in either direction. It’s also worth mentioning that ICHR was not alone among semis in rallying in the last couple of months. The iShares PHLX Semiconductor ETF ( SOXX ), an ETF consisting of 30 companies active in the semiconductor space, for instance, gained about 30% in the last two months of 2023. In fact, the stock market as a whole rallied. The recent rally from ICHR was thus likely more a case of a rising ride lifting all boats and not so much something specific to ICHR.

ICHR has essentially been stuck in a trading range since July 2022 and it has yet to succeed in breaking out of it. As mentioned in the prior article, ICHR is facing resistance, which has kept a lid on its ability to move higher. There have been numerous attempts, including going as high as $39.73 in early 2023, but all attempts to break through the $36-40 region have been unsuccessful despite numerous tries, including in June-August 2023.

ICHR has not overcome this resistance with the most recent rally stopping just short of the $36-40 region at $34.90. At the same time, ICHR has not fallen to new lows even though it hit a low of $22.26 on November 9, which is above the July 2022 low of $21.08 and the October 2022 low of $21.04. In other words, the stock has done nothing more than remain stuck in a trading range, the magnitude of the recent rally notwithstanding.

It’s also worth mentioning that the stock may already be close to fair value. The average of Wall Street price targets has a target of $32.50. This is somewhat above the current stock price of $31.74 as of January 8. With this and everything above in mind, the risk is probably to the downside for ICHR. The stock has rallied a great deal in the last two months and it is probably due for a move lower towards the bottom end of the aforementioned trading range.

The outlook for 2024

The stock went up in 2023, but the same cannot be said of sales and profits as they went down in 2023. In fact, ICHR disappointed with its most recent report on November 6 as mentioned earlier. ICHR posted non-GAAP EPS of $0.07 on revenue of $196.8M in Q3 FY2023, which was $0.01 less than expected. Keep in mind ICHR benefited from an income tax benefit that was bigger than expected, which means the numbers could have been worse. The table below shows how the numbers have dropped in Q3 FY2023.

Source: ICHR

Still, the Q3 numbers were somewhat of a sequential improvement, but the outlook suggests the numbers will stay flat for several quarters. The consensus is that ICHR will report non-GAAP earnings of $0.07 on revenue of $197.5M in its upcoming report, most likely in early February. This is in line with guidance from ICHR as shown below. ICHR is projected to end FY2023 with non-GAAP EPS of $0.54 on revenue of $805M. In comparison, ICHR earned $3.37 on revenue of $1,096.9M in FY2021 and $3.62 on revenue of $1,280.1M in FY2022, which gives you a sense of how challenging the past year was for ICHR.

Source: ICHR

If ICHR does wind up with earnings of $0.54, then this would imply a P/E ratio of almost 59 with a stock price of $31.74 or a market cap of around $949M. This is for non-GAAP since ICHR is in the red in terms of GAAP. Most would probably agree that this is on the high side, especially if ICHR does not grow much in the near term to bring down multiples.

What will 2024 be like

Better things are expected in 2024 than 2023. Wall Street estimates expect ICHR to improve to $0.83-1.00 on revenue of $866-880M in FY2024. These estimates are based on the belief the market for fab equipment will grow in 2024. For instance, a recent forecast from SEMI predicts the fab equipment market will grow by 15% YoY to $97B in 2024 after contracting in 2023.

However, there are a couple of caveats worth noting. ICHR is counting on EUV-related demand staying resilient, but this could be subject to change. Both TSMC ( TSM ) and Samsung have, for instance, delayed the start of production of their new high-end fabs under construction in the U.S. Similarly, NAND-related demand could be a swing factor. The NAND market has been very weak, which has worked its way through to ICHR, so any change here would make a major difference.

ICHR for its part sees a slow start in the new year with a flattish first half in FY2024 compared to the last quarter of FY2023. The second half is expected to be better than the first half, but the real growth spurt is not expected to come until FY2025. From the Q3 earnings call:

“We I think what we see looking into 2024 are very similar levels of revenue, kind of bounce along the bottom here. I think in, an outlook for WFE, I would say, in general, I think that kind of mirrors what most people are expecting, I think, in the market with an inflection beginning in the second half. In general, it's going to have to inflect, sometimes near to the fourth quarter unless the 2025 outlook changes materially, but I think most people are looking at a very strong 2025, similar.”

A transcript of the Q3 FY2023 earnings call can be found here .

Investor takeaways

The powerful rally toward the end of 2023 helped pull ICHR out of a hole, which helped ICHR end 2023 will solid gains for the year. However, it’s worth noting that the rally was not due to anything different at ICHR. The entire stock market rallied and ICHR went along for the ride. ICHR is still dealing with the same issues it was when the stock hit a new 52-weeks low in early November.

Demand remains weak and the latest outlook from ICHR does not expect that to change for the next couple of quarters. The first half of 2024 is expected to remain flat. The second half could be better, but any major change is not expected to come until the following year in 2025. It’s also possible this timeline could change for several reasons, including continued adoption of EUV.

The stock remains caught in a trading range and the recent rally in the stock has not made a difference. The stock came close to challenging a previous identified resistance region in the high thirties, but it has not been able to breach resistance, which has held since mid-2022. If anything, if recent chart patterns hold, the stock is likely to make its way back to the lower end of the trading range. This could be down in the low twenties, especially if multiples stay where they currently are.

I remain neutral on ICHR. Nothing has happened thus far that warrants a change in stance, the recent rally notwithstanding. This rally may have masked the fact ICHR is still dealing with headwinds, but that does not mean the headwinds are no longer there. ICHR actually came up short with its latest report, including in terms of earnings and outlook, but the rally may have drawn attention away from this.

With that said, while long ICHR is probably not worth pursuing as an investment, it may make more sense as a temporary trade. Such a short-term trade could be warranted if, for instance, the stock gets back to the low twenties. The stock should then be sold once it gets back to the mid-to-high thirties, something recent trading patterns suggest it is likely to do.

Bottom line, the future is not set in stone, but ICHR is likely to keep trading sideways for a while longer. ICHR’s own outlook is calling for a flattish few quarters. The stock has rallied in the last couple of months, which means the next direction the stock is likely heading for is down. Odds are that is what will happen in my view.

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