Tag Team Options Trade: KLIC
By Jill Malandrino 03/19/13 - 08:04 AM EDT
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Jill: One of my key themes for 2013 has been the better-than-expected capex spend and how the tech space will benefit from that, particularly semiconductors and equipment manufacturers. Kulicke & Soffa (KLIC) is a global leader in the design and manufacturing of semiconductor assembly equipment, operating in two industries, Equipment and Expendable Tools.
KLIC operates in a very cyclical industry based on the capacity requirements and capital expenditure decisions of the semiconductor manufacturers. These decisions are mainly driven by two factors: 1) semiconductor demand; and 2) replacement orders. After a slight decrease in semiconductor demand in 2012 due to a weak global economy, growth is expected to resume in 2013 driven by mobile devices.
There is very low competition in the space and the duopoly industry structure is working well as both companies are growing and profitable. KLIC is not a part of a capital intensive business but rather a R&D led industry. The company's PPE, cap-ex, and depreciation are extremely low, while boasting high margins during cycle booms. KLIC also boasts a cash-rich balance sheet and has no debt. Besides using cash to make acquisitions, there has also been speculation around share buybacks.
After a 15% drop in share price following 1Q13 results and lower-than-expected 2Q13 forecast, now appears to be a good time to enter a long position to take advantage of growth in the second half of 2013 and the next several years (not to mention it's been holding the 200 DMA since December). Let's turn it over to Skip for his take.
Skip: As Jill menitoned. KLIC makes the equipment and tools used to make semiconductors, and that can create a challenge and an opportunity for management. Due to excellent management KLIC has no debt and net cash of $6.58 per share according to the numbers for KLIC found on Yahoo! Finance and trades at a forward P/E ratio of just 7X. The stock has a rather smallish float of only 74 million shares. That fact alone will add to any stock's volatility as a small float invites chaos in both price directions.
Technically, KLIC's chart shows that it has traded between $8 and $13 for the past two years. Less than two months ago KLIC attempted to break out over $13, but the ran into sellers as management guided analysts' revenue numbers lower as per the next quarter.
KLIC options vols are trading in the low 30s which is a very fair offered level given the 1.44 current beta for KLIC. The options are liquid and their bid/ask markets tight so as to offer good options execution.
The trade tactic I like now for KLIC is the synthetic call expiring in October. That synthetic position (long stock and long a married put) is trading around $1.10. This tactic controls risk 100% yet is open-ended (not hedged) as per the upside potential for the underlying stock. Thus, the synthetic call acts exactly as does the October 11 call does in all respects.
Trades: Buy 300 KLIC shares for $11.00 and buy to open 3 KLIC October 11 puts for $1.10.
The total risk for the trade is $1.10 per synthetic call. As always, we will monitor the trade on this site in the comments section below.
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