Investor Essentials Daily

The build-out in chip capacity means this company will see demand continue to surge

Amkor Technology, Inc. (AMKR)
June 16, 2021

With many major semiconductor chip companies beginning to ramp up production and build out capacity amidst recent shortages, this company is primed to succeed.

Yet, rating agencies still seem skittish when rating the company’s debt, which seems unwarranted given its strong positioning.

Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.

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The recent chip shortage has caused chaos across multiple industries. The most recent time we touched on the supply chain crisis was with Ultra Clean Holdings (UCTT), which you can revisit here.

Industries such as the automotive market need more chips than ever to satisfy rising demand. Coupled with supply chains disrupted by the pandemic, markets are struggling to keep up.

When the capacity tightens as much as it has, especially in the semiconductor chip industry, the consequence is surging investment in expansion for capacity.

It looks like that is exactly what is starting to happen. Many major players in the chip industry that have been keeping capacity constrained for some time now are beginning to ramp up production.

And of course, the biggest winner from this specific trend in the industry will be every company that supplies the industry.

People can draw many parallels from this trend with the idea of supplying the pickaxe sellers during the gold rush.

This even included one company that does not have much coverage at all. The name of the company is Amkor Technology (AMKR).

Amkor Technology makes a lot of the testing equipment that ensures semiconductor chips function correctly and safely. The company is primed to see surging demand, given many companies are beginning to ramp up chip production and build out capacity.

However, for some reason, major rating agencies are still skittish when rating Amkor Technology’s debt.

Specifically, Moody’s gives the company a non-investment grade speculative Ba3 rating, with the implied assumption of a 10%+ risk of default over the next five years.

They believe Amkor Technology has imminent risk of default into the near future.

This is very different from what we see here at Valens.

Our Credit Cash Flow Prime (CCFP) analysis is able to get to the heart of the firm’s true credit risk.

In the below chart, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

As depicted, Amkor Technology has massive cash liquidity and therefore should have no issues handling its obligations going forward. On top of this, even if the firm did not have access to this capital, cash flows alone exceed all obligations by a wide margin every year up until 2027, when the firm faces material debt maturities.

That said, the firm has an ample runway before then to refinance, if needed.

Rather than a name in distress, Amkor Technology is actually a cash flow machine. This is why Moody’s Ba3 non-investment grade speculative rating, with a 10%+ risk of default expectation does not make sense.

Using the CCFP analysis, Valens rates Amkor Technology as an investment grade IG4+ rating. This rating corresponds with a default rate below 2% within the next five years, a more realistic projection once a holistic understanding of the company’s risk is taken into account.

Ultimately, Uniform Accounting and the Credit Cash Flow Prime analysis highlights how Amkor Technology’s credit risk profile is much safer than what rating agencies believe. Especially when considering the surge in demand the company is likely to see going forward.

SUMMARY and Amkor Technology, Inc. Tearsheet

As the Uniform Accounting tearsheet for Amkor Technology, Inc. (AMKR:USA) highlights, the Uniform P/E trades at 17.3x, which is below the global corporate average of 23.7x and its historical average valuation of 36.8x.

Low P/Es require low EPS growth to sustain them. That said, in the case of Amkor Technology, the company has recently shown a 473% Uniform EPS decline.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Amkor Technology’s Wall Street analyst-driven forecast is a 103% EPS growth in 2021 and 7% EPS growth in 2022.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Amkor Technology’s $23.59 stock price. These are often referred to as market embedded expectations.

The company can have Uniform earnings grow by 9% per year over the next three years and still justify current stock prices. What Wall Street analysts expect for Amkor Technology’s earnings growth is well above what the current stock market valuation requires in 2021, but below that requirement in 2022.

Furthermore, the company’s earning power is below the long-run corporate average. However, cash flows and cash on hand are nearly 2x total obligations. Together, this signals low dividend and credit risk.

To conclude, Amkor Technology’s Uniform earnings growth is above peer averages and the company is trading in line with average peer valuations.

 

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research