Ichor Holdings (Nasdaq: ICHR) filed its S-1/A with the Securities and Exchange Commission, announcing its upcoming initial public offering. The company plans to sell 5.75 million shares of its common stock at a marketed price range of $12 to $14. It also has an additional 862,500 shares as an over-allotment option for its underwriters. The underwriters for the IPO include: Deutsche Bank Securities, Stifel, RBC Capital Markets, Cowen and Company and Needham & Company. Assuming Ichor Holdings prices at $13, the mid-point of its price range, Ichor Holdings would have a market capitalization value of $318.01 million.

Business overview

Based in Fremont, California, Ichor Holdings designs, engineers and manufacturers fluid delivery subsystems to the makers of semiconductors. Their primary offerings include: gas and chemical delivery subsystems, collectively known as fluid delivery subsystems. Their gas delivery subsystems are used in semiconductor manufacturing processes, such as etch and deposition, for the purpose of monitoring and controlling quantities of the specialized gases used.

The chemical delivery subsystems blend and dispense reactive liquid chemistries used in processes such as electroplating and cleaning. Lam Research Corporation (Nasdaq:LRCX) and Applied Materials, Inc. (Nasdaq:AMAT), are the company's two largest customers accounting for 57% and 38% of sales in 2015, respectively.

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Executive management overview

Thomas M. Rohrs has served as the chief executive officer of Ichor Holdings since Sept. 2014 and as executive chairman and director of the company since Feb. 2012. Before joining Ichor Holdings, Rohrs served as the chairman and chief executive officer of Skyline Solar from 2010 to 2012 and as the chairman and chief executive officer of Electroglas from 2006 to 2009. From 1997 to 2002, Rohrs served as the senior vice president of global operations of Applied Materials.

From 1992 to 1997, he served as the vice president of worldwide operations for Silicon Graphics. Rohrs holds a Master of Business Administration from Harvard Business School and a Bachelor of Science in mechanical engineering from the University of Notre Dame.

Maurice Carson has served as the chief financial officer of Ichor since Sept. 2014 and as member of the board since Feb. 2012. Before joining Ichor, Carson was the chief financial officer of Intematix from 2011 to 2014. He was the chief financial officer of Actel Corporation from 2009 to 2010. Carson holds a Master of Business Administration from the University of Chicago and a Bachelor of Science in finance and accounting from the University of Colorado.

Financial highlights and risks

For the last several years, sales have steadily climbed at Ichor Holdings. From 2013 to 2015, sales grew at a compound annual growth rate, or CAGR, of 15.2% while adjusted net income grew at a CAGR of 57.9%. Between 2014 to 2015, sales grew by 16.7% from $249.1 million to $290.6 million and by 21.2% from $226.3 million in the nine months ended September 25, 2015 to $274.3 million in the nine months ended September 23, 2016. Net income from continuing operations increased from $5.8 million in 2014 to $12.8 million in 2015.

In general, Ichor Holdings' business is not capital intensive, and they are able to scale production quickly. Given the cyclical nature of the semiconductor capital equipment market, the company's ability to minimize fixed manufacturing costs and scale quickly, enables them to minimize any negative impacts of cyclical downturns on net income.

One risk that is important to note is Ichor's significant reliance on Lam Research Corporation and Applied Materials, Inc., which together account for 95% of its revenue in 2015. Given both customers make up such a large portion of revenue, they have significant leverage for negotiating price.

Competitors

Ichor Holdings operates in a highly competitive environment and faces competition from regional competitors in the tool refurbishment market, other suppliers in the chemical delivery subsystems and from Ultra Clean Technology in the gas delivery subsystem. Ultra Clean Technology is its primary competitor in the gas delivery subsystem. Ultra Clean Technology is a subsidiary of Ultra Clean Holdings (Nasdaq: UCTT), which has a market cap of 310.71 million and a price to sales ratio of 0.65x.

At an estimated market capitalization value of $318.01 million, Ichor Holding will trade at approximately 0.94x price/sales. This is slightly higher than UCTT, its top competitor in the gas delivery subsystem and significantly below the average 4.45x price/sales for the Semiconductor Equipment industry. At the same time, Ichor Holding reports a much higher revenue growth rate than UCTT and the industry average.

Conclusion: Consider Buying In

Increasing global demand for mobile devices and computer network systems has driven demand in the semiconductor equipment industry. This demand shows no signs of slowing down, with Gartner estimating the semiconductor device market to grow from $315.0 billion in 2013 to $350.1 billion in 2017.

Ichor Holdings is well positioned to benefit from this growth. The company has shown strong growth so far, and we expect this positive trend to continue. At its estimated valuation, Ichor Holdings appears to be a smart investment.

We recommend purchasing shares at this IPO price.