Ichor Has A New Growth Driver: Liquid Delivery Module

Deutsche Bank analysts Sidney Ho and Ross Seymore reiterated their Buy rating for Ichor Holdings Ltd (NASDAQ: ICHR) and increased their price target for the stock from $26.91 to $32.

They were encouraged by the new liquid delivery model contract and by a stronger capex environment in second-half 2017 and 2018. They believe the valuation gap between Ichor and its closest competitor should continue to shrink as the company continues to gain market share.

After the market close Monday, Ichor announced it has entered a substantial agreement to produce liquid delivery systems for one of its key customers. As a result, the stock spiked 8 percent Tuesday.

Deutsche Bank analysts believe the company is going to increase its market share in liquid delivery modules from its current share of approximately 10 percent to 20–30 percent over the next few years, which should increase the company's gross margin. The analysts expect a quarter-over-quarter fourth-quarter revenue growth of 8 percent versus their previous estimate of 3 percent. They also increased the full-year revenue growth estimate from +14 percent to +17 percent, the 2017 EPS estimate from $2.43 to $2.48 and 2018 EPS estimate from $2.80 to $3.00.

The analysts applied approximately 11x price to earnings multiple on their $3.00 2018 EPS estimate, which is higher than their previous multiple of approximately 9x. They also see the current multiple at a 10 percent discount to its closest competitors.

Deutsche Bank sees key risks for the thesis in industry and customer concentration, as 95 percent of revenue comes from two customers and it is entirely focused on the semiconductor industry. The other risks can be cyclicality of the business and market share loss to its customers' internal manufacturing resources and other smaller or domestic suppliers.

At time of publication, shares of Ichor were up 10.97 percent at $29.86.

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