An investment in Ultra Clean Holdings (UCTT) last year would have returned nearly 120% in just over a year’s timeframe. Per Seeking Alpha Premium, the stock easily beat the S&P 500’s 9% return in 462 days:

UCTT is originally a DIY Marketplace subscriber request. Its first-quarter results re-affirmed the company’s strong 30-year history in enabling semiconductor technology. When the company reports Q2 results later next month, the market should expect the company to continue its outperformance. Why is Ultra Clean such a well-run company?

Ultra Clean Technology Mission Statement, Employees and Hiring ...

Strong Revenue Growth

UCTT posted a non-GAAP EPS of 52 cents. GAAP EPS came in at 23 cents, as revenue grew 23.4% from last year. CEO Jim Scholhamer said the company owes its quarterly results strength to early preparedness to the pandemic. The CEO said, “early recognition of the pandemic, supported by an exceptional business continuity team and a dedicated workforce, allowed us to minimize disruptions to our facilities and supply chain for both equipment and service operations.”

Below, the company posted revenue CAGR of 23% since 2016:

Data courtesy of Ultra Clean Holdings

For the current quarter, the company widened its forecast to reflect the impact of the coronavirus pandemic. It said that it “expects revenue in the range of $290.0 million to $330.0 million and GAAP diluted net income per share to be between $0.24 and $0.40. The Company expects non-GAAP diluted net income per share to be between $0.40 and $0.56.”

Even if quarterly earnings fall sharply in the quarter, the stock should not correct by much. Unless the market as a whole drop, an unlikely event, investors who missed the rally need not wait for an entry point. When markets panic-sold stocks in March, the Fed stepped in. Since then, the Fed signaled it would buy more assets as needed to sustain market liquidity. That liquidity guarantee suggests markets will not fall.

UCTT stock trades at a 10 times price to free cash flow ratio and a modest debt/equity of 0.75 times.


Ultra Clean is well prepared with the current crisis because it has operations in China. It learnt how to deal with the sudden shutdown in the region earlier this year. While the world reacted, Ultra Clean quickly re-aligned its staff to work from home and have personal protective equipment. Therefore, it will re-orient its supply chain to minimize any business disruptions ahead.

The 13% sequential growth in the first quarter should continue in the current period. Most of the increase was due to natural demand, not advanced purchases. CEO James Scholhamer said:

We don’t believe it was advanced purchases because we saw these bookings before a lot of the crisis hit. Basically, we were able to mitigate a lot of the shortfalls that we had seen as issues when we went into the quarter. So the majority of the increase was kind of already expected from the ramp that we came out of in Q4.

The company hinted that fab utilization will grow for the rest of the year. CFO Sheri Savage said on the conference call that “our services group contributed $61.5 million, up 9.4% as wafer fab utilization returned to more normalized run rates.” If Samsung (OTC:SSNLF) and Intel (INTC) continue to grow and demand more chips, investors should expect the OEM business to accelerate through the course of 2020.

A series of OEM wins in recent months suggests that Ultra will release revenue from customer projects and products coming out in the next year. The company did not name specific customer wins but investors may guess who they are. For example, the OEMs may produce 3D NAND, DRAM, and 5G:

Data courtesy of UCTT

UCTT also said that the top 4 OEMs accounted for 12% of the QuantumClean/ChemTrace business last year.

Fair Value

Just two analysts offer a one-year price target on Ultra Clean stock, with an average of $24.50 (per Tipranks). Conversely, investors may run a revenue multiples model that values the stock relative to benchmark companies:

Model courtesy of finbox

Ultra Clean has a good geographical diversity for its operations. Higher demand for smaller components will let the company maintain low inventories. Similarly, higher demand for customized, instead of the standard, components will keep its inventory levels between itself and the OEMs at manageable levels. For example, customers have a higher demand for customized components like a mass flow controller or a power supply.

Your Takeaway

Many semiconductor companies that I follow closely trended higher since the V-shaped stock market rebound that started in March. But Ultra Clean Holdings is at the start of a fundamentally strong product ramp. Customer demand levels are healthy and will increase. Chances are good that the stock will revisit its $28 closing high last seen in February within the next year.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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