Amkor What?

Shares of Amkor Technology (AMKR) shot up 19% to a new 20-month high of $6.84 Thursday after the semiconductor testing and packaging company said its fourth-quarter earnings more than doubled Wall Street's forecast.

"The bulk of the positive surprise is due to improving margins," wrote Andrew Biggs, an analyst at Bala Cynwyd, Pa., brokerage Susquehanna Financial Group, in a Thursday note. "The company's restructuring efforts are paying off, as management expects selling, general and administrative expenses to decline substantially in 2006 despite increasing revenue."

Biggs listed two catalysts for the company's return to profitability after more than a year of losses: cost cuts and a favorable debt refinancing. Still, he rates the stock a Neutral, as he feels the good news is already priced into the shares.

The fourth quarter saw Amkor swing to a profit of $54 million, or 30 cents a share, reversing a loss of $36 million, or 21 cents a share, for the year-earlier quarter. Excluding one-time items — $4.4 million in proceeds from a unit sale and a $9.9 million tax gain, offset by $3.3 million in severance costs — profits would've totaled 24 cents a share. Analysts were looking for 12 cents a share, according to Thomson First Call.

For the full year, Amkor lost $137 million, or 78 cents a share, compared with a loss of $38 million, or 21 cents, for 2004.

Revenues for the fourth quarter increased 42% year-over-year and 17% sequentially to $643 million. The company attributed the improvement to stronger-than-expected customer demand, a favorable product mix, improved pricing and a larger contribution from its newer factories. The Chandler, Ariz., company tests semiconductors and assembles them into black, plastic packages of many chips, which are used in memory cards, camera sensors, cellphone processors and more.

The semiconductor industry, of course, is subject to cyclicality and sharp price swings. Amkor spokesman Jeffrey Luth says the fourth quarter marked the end of two years of overcapacity that hurt prices, even as the cost of raw materials like gold, used for wires, soared.

"Things are better now," says Amkor's Luth. "Capacity is tight and will remain so for the rest of the year. So pricing is better and we are passing on the [raw-material] costs."

A surge in demand for consumer electronics and wireless communications products has also helped Amkor fill manufacturing capacity in its newer factories, improving its operating leverage.

"I am serious about transforming Amkor into a profitable company and I'm committed to promoting a strong sense of fiscal discipline," said James Kim, Amkor's chairman and chief executive, during Wednesday's conference call. "We intend to earn your confidence in our business strategy and our management team."

Kim said Amkor must bring operating expenses in line with industry norms and consistently achieve gross margins in the mid-20% range. Fourth-quarter gross margin was 24.2%. Kim added that the company must be more selective in its capital spending and must generate free cash flow in order to reduce debt.

"The company lacked discipline in the past, but it has demonstrated over the past two quarters that it is serious about improving profitability going forward," says Bill Ong, an analyst at American Technology Research, an independent research house in Greenwich, Conn. "Average selling prices are up and it is turning down low-margin business to keep the prices firm."

The company also offered first-quarter guidance that outstripped Wall Street's prediction. It said profits would total 10 cents to 14 cents a share. Analysts had forecasted a penny loss. And the company said sales would only dip 3% to 5% in the first quarter from the fourth, vs. its typical seasonal decline of 5% to 10%. That implies revenues of $611 million to $624 million for the first quarter. Analysts had expected $583.5 million.

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"Even though it had a nice move Thursday, it's still very cheap compared to the rest of its group," says Ong of American Technology Research, who reiterated his Buy rating. "Amkor has had execution missteps in the past. But it demonstrated good execution in the third and fourth quarters and built credibility delivering what it promised. Even going into the conference call, people were concerned about execution, but you have to take their word that they are much more serious than they were in the past if they have two successful quarters in a row."