ICHR - Ichor Holdings: The Worst May Have Passed

2023-05-12 05:17:04 ET

Summary

• Ichor Holdings has updated its FY2023 outlook, which included some significant downward revisions in several areas.
• ICHR managed to partially blunt the impact of the latest guidance by calling for a bottom, followed by a gradual recovery from the downturn.
• The stock may be close to one, and perhaps two, support levels, according to the charts, which suggests there is probably more upside than downside out there.
• ICHR is most likely heading sideways overall, as it has essentially done for some time now, a short-term rally notwithstanding.

The market did not like what Ichor Holdings ( ICHR ), a supplier of fluid delivery subsystems used in semiconductor manufacturing equipment, had to say in its latest report. Guidance, in particular, came in weaker than expected, leading to a downward revision of the FY2023 outlook. However, ICHR also attempted to offset the sting from weaker-than-expected guidance by calling for a recovery, starting as soon as the second half of FY2023, something that could limit the fallout from what was probably a disappointing report to many. Why will be covered next.

Why ICHR's guidance was weaker than expected

ICHR had prepared the market for a sequential decline in the top and the bottom line in Q1 when it guided for revenue of $210-240M and non-GAAP EPS of $0.19-0.37 after Q4, but it managed to beat expectations by $0.10 with non-GAAP EPS of $0.38 on revenue of $225.9M. The table below shows the numbers for Q1 FY2023.

However, it's important to note that without an unexpected tax windfall in Q1, EPS would have been $0.12 less. The top and the bottom line still dropped compared to the preceding quarters, the latter in part due to lower margins. ICHR actually posted a net loss in terms of GAAP, although by just a sliver. ICHR also has $300M of debt on the balance sheet, partially offset by $68.8M in cash and cash equivalents.

Source: ICHR

The top and the bottom line peaked at $355.6M and $1.22, respectively, in Q3 FY2022, but the numbers have been going down since then. Furthermore, this decline is expected to continue in Q2 FY2023. In fact, it was Q2 guidance that took center stage. Guidance calls for Q2 revenue of $170-190M, a decline of 20.3% QoQ and 45.4% YoY at the midpoint. The forecast also believes ICHR will merely break even, both in terms of GAAP and non-GAAP as shown below.

The downbeat guidance came as a surprise, which is why management added some color as to the driving force behind the weak guidance. From the Q1 earnings call:

So while our Q1 results were consistent with our expectations, the customer demand environment has further weakened year-to-date. We witness incremental push outs in order cancellations for most of our OEM customers as we progress through the quarter, largely as a result of additional reductions in memory investments as well as some curtailment of spending on leading edge logic."

A transcript of the Q1 FY2023 earnings call can be found here .

ICHR acknowledged facing weakness in places it did not expect to.

While still a small portion of our business, these segments previously were expected to perform quite a bit better in WFE in 2023. And now we've seen some additional softness in these non-semi markets that reflect the overall weakness in the macroeconomic conditions."

ICHR also commented on the overall state of the industry.

We believe it is well understood at this point that the further softening in semiconductor CapEx expectations this year reflects a 20% to 25% decline in total wafer fab equipment spend. And within this range, the non-litho part of the market is now expected to be down by at least 30%."

The wafer fab equipment market is expected to contract by 20-25% in 2023 and, if the lithography segment is excluded, then the contraction is at least 30%.

The outlook from ICHR calls for a recovery in the second half of FY2023

However, management attempted to soften the blow from the latest guidance by calling for a trough in Q2, followed by an upturn in the following quarters.

With our current visibility, we are expecting a 20% sequential decline in revenues for Q2, followed by a recovery.

We believe Q2 marks the trough quarter for our revenues this year, with both the gas panel and the component businesses expected to grow sequentially in Q3 and Q4. Product mix will again be less favorable with the expected revenue profile in Q2."

The outlook suggests a 5-10% QoQ increase in revenue in Q3, followed by another 5-10% increase in Q4.

I think the way we're seeing it and the outlooks that we're having, we're seeing kind of a 5% to 10% increase from quarter two to quarter three today and then something similar in quarter four."

Q2 guidance calls for revenue of $405.9M at the midpoint halfway through FY2023. Add a 5-10% sequential increase in Q3 and Q4 and FY2023 revenue is projected to end up around $807-808M at the midpoint. This implies a YoY decline of about 37% since FY2022 revenue was $1,280M. Non-GAAP EPS is projected to end up around $1.35, which represents a YoY decline of 62.7% since ICHR earned $3.62 in FY2022.

The outlook could be subject to further revisions

However, it's important to be somewhat cautious with the latest outlook. After all, ICHR has already revised its FY2023 outlook once before, which means it can always happen again. For instance, ICHR had earlier suggested a 15-20% YoY decline in FY2023 revenue, but the latest outlook from ICHR, which takes Q3 and Q4 into account, suggests a roughly 37% YoY decline in FY2023 revenue, which is much worse.

ICHR had previously suggested Q1 and Q2 would be similar, but the latest guidance from ICHR calls for a roughly 20% QoQ drop in revenue in Q2. ICHR had uttered the possibility of Q1 being the trough, but that's not going to happen with the updated outlook from ICHR. ICHR now believes Q2 to be the trough, which might very well happen, but if ICHR was wrong before, it can be wrong again. The outlook is by no means set in stone.

The stock sold off after the Q1 report

The market gave the latest report from ICHR a thumbs down with the stock losing 6.5% the day after. And if not for the outlook calling for an imminent recovery, the drop would likely have been even bigger. With this drop, the stock fell into negative territory for the year with a loss of 1.4% YTD. The stock has now completely erased the rally earlier in the year, which saw ICHR appreciate by as much as 38% at one point as shown below.

The stock has been in decline for months and some may be tempted to short the stock based on this, especially in light of the latest report. However, this may not be a worthwhile move since support may be not be far away, which is likely to limit further downside for the stock. As pointed out in a previous article , the stock has been forced into sideways action with support in the $21-23 region and resistance in the $36-38 region.

The latter is why the article suggested on 2/12 the stock could be topping out since it was fairly close to resistance in the $36-38 region, a level that had already demonstrated its ability to keep the stock contained. This turned out to be correct with the peak in early February and the stock spending the months that followed going lower. As noted before, the stock appears to be in what is essentially a horizontal trading channel.

The stock is currently in the lower range of this channel, which is why shorting is probably not a good move with support much closer than resistance. On the contrary, going long is more likely to yield a bigger return than going short at this point, assuming the stock follows recent chart patterns and moves back to the upper range of the channel where resistance is likely to be found in the $36-38 region.

It's true the stock is at $26.45, which means it has ways to go before hitting the $21-23 region, but the stock may have already found support. Note that the stock hit an intraday low of $25.02 post-earnings, which is $0.10 away from the January low of $25.12. It's also close to the December low of $25.21. All this suggests some level of support in the $25-26 region. Going short just above potential support is something to avoid.

Investor takeaways

I am neutral on ICHR since the most likely path forward for the stock is to head sideways within a channel bounded by the $21-23 region and the $36-38 region. The fact that ICHR is calling for the trough in Q2, followed by a recovery, will likely limit the amount of downside for the stock, just as how the outlook for an imminent recovery limited the fallout from Q2 guidance calling for a 20% QoQ decline in revenue instead of staying flat as ICHR had stated earlier in the year.

The stock also trades at relatively modest valuations, which could put a floor under the stock. For instance, ICHR is valued at 0.58 times TTM sales with a market cap of $737.2M. True, ICHR is only expected to break even in terms of GAAP in the next earnings report, similar to the one before, but, if ICHR is right, the numbers are expected to get better once Q2 is over.

Shorting is therefore unwise with the above in mind, especially with the stock close to one, and possibly two, support levels in the charts. On the contrary, those willing to bear the risk may actually want to go long betting that ICHR has it right with its latest outlook calling for an upturn in the top and the bottom line. Keep in mind though that ICHR got it wrong before.

Still, even if the stock turns it around from the decline in the past few months, the stock is facing strong resistance in the $36-38 region. It's not impossible for resistance to be breached, but this will likely require a recovery from the current industry downturn ICHR finds itself in and which has yet to come to an end.

Bottom line, the stock may go on a rally in the coming months based on the prospect that the worst has passed, but that will only result in recovering ground that was lost in the preceding months. The overall direction for the stock remains sideways. While this may be an opportunity for the nimble trader, most will likely find this course of action to be less than satisfying.

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