Bear of the Day: Ultra Clean (UCTT)

Kevin Cook Published on November 16, 2018

Ultra Clean Holdings (UCTT - Free Report) is a $350 million developer and supplier of critical subsystems for the semiconductor capital equipment, flat panel, solar and medical device industries.

Ultra Clean offers its customers an integrated outsourced solution for gas delivery systems and other subassemblies, improved design-to-delivery cycle times, component neutral design and manufacturing and component testing capabilities. The company is headquartered in Menlo Park, California.

I last wrote about Ultra Clean as the Bear of the Day on August 8 when shares were trading near $15. The stock has been smacked down by over 35% since then, especially since its earning report last week.

Here's what I said in my August report...

Ultra Clean has crossed the $1 billion revenue threshold this year, which certainly makes it a strong value on a price-to-sales ratio basis.

But earnings estimates have dropped significantly since the company reported their Q2 on July 26 and that's why the stock is in the cellar of the Zacks Rank.

In the past 30 days, this year's consensus EPS projection has fallen 16% from $2.30 to $1.93. Next year's profit forecast also dropped buy only 11% to $2.38.

The analyst downward revisions were inspired by management commentary and guidance about the second half outlook. One of the company's top customers is Lam Research (LRCX - Free Report) who also reported on July 26 and indicated on its earnings call that it expects September to be its trough quarter for the year in a transitory weak patch in the semi equipment cycle.

But while Lam has only gone up since earnings, the pessimism lingers for UCTT. Stifel Nicolaus analysts lowered their price target to $26 (from $30) while keeping a Buy rating on the stock, citing that most of the bad news is now priced-in.

(end of my August 8 report excerpts)

Since then, Ultra Clean has continued to disappoint in the midst of a predominantly bearish cycle for the Semiconductor sector.

Clearly the Stifel analysts were still too optimistic on the current Semi Cycle (as I have often been). We will both get our comeuppance today as NVIDIA (NVDA - Free Report) shares make their own new 52-week lows on a big revenue guidance miss.

Back to UCTT, last week the company reported mixed results and the stock sank to new 52-week lows as earnings continue to collapse, even in the face of solid sales growth.

Here's a look at the Zacks proprietary Price & Consensus chart which gives you a visual of annual earnings estimate revisions. You can clearly see how the stock price has followed the lowered outlook...

I hope it's clear for you to see that until the earnings estimates stop going down, and start heading back up, it may be best to "stand clean" of Ultra Clean.

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