This niche provider to the semiconductor industry has a cast-iron balance sheet that should enable it to ride out most storms comfortably, says Paul Hill.
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
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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