Ultra Clean Holdings Inc: Why this Cheap Tech Stock Could Double

uctt stockUltra Clean Holdings Stock Is a Super-Cheap Semiconductor Play

The PHLX Semiconductor Sector Index traded at a 52-week high on December 3, more than double its March low. There’s a view that the Joe Biden administration will be friendlier to Chinese technology companies, albeit in reality, there could be minimal changes.

A compelling small-cap semiconductor stock with a strong risk/reward ratio is Ultra Clean Holdings Inc (NASDAQ:UCTT), a developer of key subsystems found in numerous applications.

The company has pursued an aggressive acquisition strategy, buying up five companies, including Quantum Global Technologies, LLC for $400.0 million in 2018. The addition expanded Ultra Clean Holdings’ business to advanced parts cleaning and analytics.

UCTT stock is up 47% this year and traded at a 52-week high of about $36.50 on December 8.

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While Ultra Clean Holdings stock has nearly tripled since trading at its low of $11.79 in March, its valuation remains compelling, at 12.5 times its consensus 2021 earnings-per-share (EPS) estimate.

Massive Breakout on Golden Cross

The below chart shows UCTT stock rallying from its March low, characterized by a strong V-shaped rally to well above its 50-day and 200-day moving averages (MAs).

Triggering the move was a golden cross pattern (a bullish technical move when the 50-day MA breaks above the 200-day MA) in June.

The Ultra Clean Holdings stock chart points to further upside moves if the stock can hold the multi-year breakout at $35.00.

Chart courtesy of StockCharts.com

Acquisitions Drive Revenues to $1.0 Billion

Ultra Clean Holdings Inc’s acquisition strategy is reflected in its five-year revenue picture, with revenues more than doubling from 2015 to 2018.

The company’s revenues contracted slightly in 2019 but its outlook is encouraging.

Fiscal Year Revenues Growth
2015 $469.1 Million N/A
2016 $562.8 Million 20.0%
2017 $924.4 Million 64.3%
2018 $1.10 Billion 18.8%
2019 $1.07 Billion -2.8%

(Source: “Ultra Clean Holdings Inc.” MarketWatch, last accessed December 8, 2020.)

Analysts estimate that Ultra Clean Holdings Inc will ramp up its revenues by 30.5% to $1.4 billion for full-year 2020, largely due to the inclusion of revenues from Quantum Global. (Source: “Ultra Clean Holdings, Inc. (UCTT)” Yahoo! Finance, last accessed December 8, 2020.)

In 2021, it’s predicted that the company’s revenues will rise 8.6% to $1.5 billion after the acquisition boost.

A look at Ultra Clean Holdings’ earnings before interest, taxes, depreciation, and amortization (EBITDA) shows five consecutive years of positive results. The last two years showed some EBITDA weakness as the company integrated Quantum Global.

Fiscal Year EBITDA (Millions) Growth
2015 $17.9 N/A
2016 $34.1 90.8%
2017 $100.4 194.1%
2018 $82.8 -17.5%
2019 $75.3 -9.0%

(Source: MarketWatch, op. cit.)

Ultra Clean Holdings produced profits on a generally accepted accounting principles (GAAP) EPS basis from 2016 to 2018, prior to producing a small loss in 2019.

Fiscal Year GAAP Diluted EPS Growth
2015 -$0.34 N/A
2016 $0.30 188.2%
2017 $2.19 629.6%
2018 $0.94 -57.0%
2019 -$0.24 -125.3%

(Source: MarketWatch, op. cit.)

On an adjusted basis, Ultra Clean Holdings Inc is expected to deliver $2.70 per diluted share in 2020, up from $0.91 per diluted share in 2019. Looking ahead to 2021, it’s estimated that the company will report an adjusted $2.90 per diluted share. (Source: Yahoo! Finance, op. cit.)

As far as free cash flow goes, Ultra Clean Holdings delivered positive results in the last four years, including a five-year high of $94.7 million in 2019, up 508.7% from 2018.

Fiscal Year Free Cash Flow (Millions) Growth
2015 -$9.2 N/A
2016 $10.3 211.6%
2017 $32.8 218.1%
2018 $15.6 -52.5%
2019 $94.7 508.7%

(Source: MarketWatch, op. cit.)

Analyst Take

I like Ultra Clean Holdings Inc’s acquisition strategy to expand into other growth areas.

Despite its price appreciation, UCTT stock is still cheap. Even if Ultra Clean Holdings stock doubled, its valuation would still not be expensive.

The expected growth in the semiconductor space could fuel a significant demand for Ultra Clean Holdings’ solutions, which would be good for shareholders.