Share tips: Top-notch chip-maker

MKS Instruments (Nasdaq:MKSI), rated OVERWEIGHT by Barclays Capital

MKS Instruments is a provider of niche parts and process controllers to manufacturers of capital equipment within the semiconductor industry (62% of sales). Here it's the market leader, having roughly a 34% share of its addressable market. It booked a 2010 turnover of $853m, with just over half being derived from outside America, underpinned by its cutting-edge science, which is protected by 650 patents.

Yet in July the stock slumped because of a temporary deceleration in orders. As a result the board trimmed its guidance for Q3 EPS to between 40 and 60 cents on turnover of $180m-$210m. Chief executive officer Leo Berlinghieri added that there was some softening in the chip sector after a few quarters of strong shipments in smartphones, tablets and other mobile devices.

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But a small air-pocket in demand should not be a surprise in this cyclical industry. What's more, the firm is diversifying its product reach and incorporating its clever instrumentation into other exciting areas, such as flat-panel displays, solar cells and data storage. Better still, regardless of any recession, MKS has a cast-iron balance sheet that should enable it to ride out most storms comfortably. Indeed, with cash of $496m (or $9.30per share) and net tangible assets of $15 per share, it could even take advantage of present low valuations to snap up rivals.

Wall Street is forecasting a second-half turnover and adjusted EPS of $379m and $0.95 respectively. That puts the shares on a "six-month run-rate" p/e ratio of 12.2, dropping to a mouthwatering eight, if the cash pile is stripped out. Instead, I would value the group on an eight times enterprise value to EBITA multiple. Adjusting for the net funds, that produces an intrinsic worth of over $31 per share.

Any prolonged downturn would inevitably affect margins through lower capacity utilisation and pricing. For British investors there's foreign exchange risk to consider too. Nonetheless, MKS Instruments has top-notch products and should be a long-term beneficiary of the growth in electronics. Barclays Capital has a price target of $32 per share.

Rating: BUY at $23.1