ENTG - Entegris Could Be On Hold Before Change Gets Here

2023-04-23 21:08:36 ET

Summary

• Entegris is caught between support and resistance in the charts, but this cannot continue indefinitely, and change may be in store.
• There are a number of potential catalysts that are coming up, which could power the stock higher through resistance or lower through support.
• ENTG is facing several headwinds, which include the income statement and balance sheet, but ENTG could have a surprise waiting.
• Change is likely coming, but it may not be in the form people expect, which suggests some measure of caution is warranted.

The bounce with which Entegris ( ENTG ), a supplier of materials and process solutions for the semiconductor industry, started 2023 has fizzled out. The stock has resumed heading south after running into what appears to be resistance. It looks like ENTG stock is heading for the recent lows at which point it will have an important decision to make. Why will be covered next.

Why the stock could go either way

ENTG had a disastrous 2022 with the stock losing 53% of its value after reaching an all-time high in late 2021, so it must have come as a relief when the stock went on a strong rally to start 2023. The stock hit an intraday and 2023 high of $89.49 on February 2, which meant the stock had gained an impressive 36.4% in about one month.

However, in doing so, the stock also ran up against what appears to be resistance. The chart below shows how if all the highs in recent months are connected, a descending trendline appears. It is this trendline that put a halt to the rally. Not only that, this same trendline has kept a lid on the stock going back all the way to last year. Note how the stock tried to break through the resistance imposed by the trendline on numerous occasions, only to come up empty every time.

The trendline is heading down, in effect forcing the stock lower. So in spite of the rally in early 2023, the stock remains in the downtrend that started not long after the stock peaked in late 2021 at $158. The stock is still up 11.4% YTD, which might not sound so bad, but it’s worse than what most semis have done for the year. The iShares Semiconductor ETF ( SOXX ), for instance, has gained 19.8% YTD in comparison.

On the other hand, while resistance has forced the stock lower, support may not be far away. Note how in the above chart the stock bottomed several times in the $60-65 region, including on November 4 when the stock hit an intraday and 52-week low of $61.75. The presence of support is strongly suggested in this region.

This region can be marked with a horizontal trendline where support is likely to exist. The stock was able to find support and reverse its decline a couple of times before in the $60-65 region, which means there is a good chance the stock might be able to do so again. On the other hand, it’s worth mentioning that the aforementioned trendlines are converging on one another. The stock has respected the boundaries imposed by these trendlines up to now, but this cannot continue once they converge and the stock runs out of space.

The stock will eventually have to break through resistance imposed by the upper trendline or, alternatively, it will have to break through support provided by the lower trendline. The two trendlines are not yet close to converging, which suggests there is some sideways action in store before change is needed.

What could power the stock through support or resistance in the short term

ENTG has yet to announce its next earnings date, probably due to the recent appointment of the new CFO. Still, ENTG is likely to announce its Q1 FY2023 report sometime in May, which means the report could come at a time when the trendlines are close to converging and the stock will have to decide whether it will break through resistance or support.

It’s therefore worth mentioning that expectations for the next report are on the low side due to Q1 guidance from ENTG, which came in way below expectations. A string of earnings projections have been revised lower after ENTG called for non-GAAP EPS of $0.50-0.55 on revenue of $880-910M in Q1 FY2023 as shown in the table below. Keep in mind that Q1 FY2022 preceded the acquisition of CMC Materials and, unlike the quarters following Q2 FY2022, does not include any contributions from CMC.

Source: ENTG Form 8-K

In contrast, expectations were for non-GAAP EPS of $0.79 on revenue of $919M. However, it’s worth mentioning that Q1 guidance from ENTG includes a one-time expense needed to align ENTG’s equity benefit plan with that of the acquired CMC Materials, which lowered non-GAAP earnings by $20M or $0.11 per share. Still, even at $0.61-0.66, EPS would have come in below expectations.

On the other hand, ENTG may have created the right conditions for a surprise in the form of say a sizable earnings beat by setting the bar low in terms of expectations. This might just be enough to power the stock higher. Keep in mind that the projected numbers for Q1 are far below what ENTG managed to achieve in recent quarters. The table below shows some of the numbers in recent quarters. Guidance from ENTG may have taken the glass half empty and not half full approach.

Source: ENTG Form 8-K

Will ENTG make adjustments to its outlook?

Another possible factor that could push the stock up or down is if ENTG decides to make adjustments to the outlook. The current outlook is for ENTG to recover with the numbers gradually getting better once it is past the trough in Q1. As a result, estimates predict non-GAAP EPS of $2.30-2.75 on revenue of $3.53-3.76B by the end of FY2023 even though ENTG will get off to a slow start in FY2023.

The numbers are expected to improve even further the following year with estimates predicting non-GAAP EPS of $3.25-4.40 on revenue of $3.48-4.19B in FY2024. In comparison, ENTG earned $3.73 on revenue of $3.28B in FY2022 and $3.44 on revenue of $2.30B in FY2021. Keep in mind that starting in Q3 FY2022, the quarterly numbers included contributions from CMC Materials.

Source: ENTG Form 10-K

ENTG could get dragged lower by a weakening semiconductor industry

The earnings projections see the numbers improving, especially in the second half. This is based in large part on the assumption that semiconductor demand will get stronger in the coming months. So, for instance, while global semiconductor sales fell 20.7% YoY to $39.7B in February 2023, according to the latest update from the Semiconductor Industry Association, most industry forecasts still project 2023 sales to be down in the mid-single digits as the numbers get better in the latter part of 2023. WSTS, for instance, is forecasting a sales decline of 4.1% YoY for the year at the end of 2023.

However, recent signs suggest this industry outlook may be too optimistic. For instance, TSMC ( TSM ) is seen by many as the industry’s bellwether due to its position as the largest foundry by far. TSM also happens to be ENTG’s top customer accounting for 12% of FY2022 sales according to the latest Form 10-K and its latest earnings call from a few days ago came in soft in terms of the outlook.

On the one hand, TSM did not change its capex budget set at $32-36B, which is positive for ENTG since it suggests TSM will continue to build its new fabs as scheduled and ENTG can count on demand for its equipment like those for microcontamination control. On the other hand, while TSM’s outlook still calls for a recovery in H2 2023, it also suggested that semiconductor demand was weaker than expected.

As a result, TSM actually lowered its FY2023 guidance from an increase in the low single digits to a decrease in the low- to mid-single digits. It also suggested a full recovery could take longer to arrive. This does not bode well for the materials segment from ENTG since it suggests lower fab utilization as chip demand stays weak for longer and there is less demand for the various gases, chemicals or CMP pads from ENTG needed to manufacture chips.

It’s also worth mentioning that TSM is not alone in its downbeat outlook. For example, Samsung recently suggested in its latest guidance that chip demand is weaker than expected after a 96% YoY drop in operating profit. Accordingly, Samsung intends to reduce memory chip production, something it had previously said it would not do in response to weakening semiconductor demand.

TSM and Samsung are the two biggest chip makers in terms of wafer starts per month and their industry outlook suggests the risk is to the downside for ENTG. At the end of the day, ENTG relies on solid demand for semiconductors and if that is not there for whatever reason, ENTG will be hard pressed to post strong earnings growth.

Will ENTG improve the balance sheet?

The CMC acquisition impacted the quarterly numbers in a big way, but it also had an impact somewhere else. The balance sheet got much worse in a hurry. ENTG paid about $5.7B in cash and stock for CMC Materials, which was financed in part through debt. According to the most recent report, total debt stood at $5.9B, partially offset by about $500M in cash. If EBITDA on a TTM basis is about $850M, then debt-to-EBITDA is 6.9x, which many would likely consider to be too high for their liking.

There are several ways with which ENTG can improve the balance sheet. One of the quickest ways to pay off debt is to sell existing assets. Management has already indicated it is willing to explore this option. ENTG already has one sale lined up and more could be on the way. From the Q4 earnings call:

“We do continue to look at various asset sales. We continue to look at the cost structure. We continue, we'll have some benefit as we move through the year on synergies, we expect that we'll bring working capital down, so while 2023 from a performance perspective is not what we've seen in the prior years, as we move forward, we expect the company will come back to be the strong cash generator that it's always been.

And with regard to asset sales, I mean we’ve been obviously, we're quite confident that the QED transaction will close, and we'll continue to review our options with regard to the rest of the portfolio.”

A transcript of the Q4 FY2022 earnings call can be found here .

What could drive the stock lower

Excessive debt is not the only issue on people’s minds. If the stock gets driven lower through support, then valuations could be a factor. The table below shows some of the multiples ENTG trades at. In general, multiples are leaning towards the high side. The stock price has room for further cuts if multiples are any clue.

Source: Seeking Alpha

Investor takeaways

ENTG has seen its stock decline in a downtrend for over a year and while it may be tempting for some to short the stock with such a track record, I am neutral on ENTG. The stock is likely to move sideways for the next few weeks before it is likely to have to decide whether to break through the two trendlines that have served as resistance and support and restricted the stock in terms of movement.

The existing trend in the charts, multiples and the state of the income statement and the balance sheet favor a breakthrough support for a move lower. On the other hand, the trend has already been in place for a long time and is due for a change. Not much is expected from ENTG as expectations are low, which means it won’t be difficult for ENTG to surprise to the upside. ENTG has several assets that it is willing and able to sell. ENTG could very well pull a rabbit out of a hat.

Bottom line, the stock could go either way at this point. Some may be willing to roll the dice and bet on a breakthrough support or resistance, but there are risks to doing so. If the risks are acceptable, then betting on a breakthrough resistance or support could pay off. Keep in mind that only one of the two is likely to happen and it is not clear which of the two outcomes has the upper hand.

There’s probably a 50/50 chance to get it right, but also a 50/50 chance to get it wrong. While some may have no issue with these odds, others are unlikely to play the game with these odds. If one is in the latter camp, it may be better to wait while the odds are more favorable.

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