ENTG - Entegris: Signs Of Life

2023-05-15 08:34:21 ET

Summary

• Shares of Entegris sold off in 2022 amidst a sell-off in semiconductor names and the wider markets.
• The company bought CMC Materials at the top of the market as well, adding a lot of leverage at the wrong point in time, causing additional pressure on the shares.
• The company has seen a relatively resilient first quarter and announced a divestment to Fujifilm in order to address leverage.
• I am still not convinced that great appeal is seen here, making me still a bit cautious here.

At the start of 2022 I last covered shares of Entegris ( ENTG ) , concluding that it was on a roll, making a big bet. The company has seen a very strong 2020, followed by an even stronger operational performance in 2021. After a deal to acquire Versum failed, Entegris was looking to acquire CMC, leaving me a bit cautious, as I feared that the timing of the deal might have been off (i.e. coinciding with the market peak).

A Recap

When Entegris was looking to tie-up with Versum in 2019, a merger which subsequently fell through, the business generated $1.55 billion in sales and $436 million in EBITDA, based on the 2018 performance.

The company was active in three segments, each benefitting from long term demand trends including specialty chemicals and engineered materials, microcontamination control and advance materials handling. The company grew 2019 sales to $1.6 billion and to roughly $2 billion in 2020 with earnings coming in near $3 per share.

Pre-pandemic shares traded at $50 per share as shares ended the year around the $100 mark, when it was evident that the company was actually thriving in the environment during the pandemic.

Amidst continued momentum in 2021, shares started the year 2022 around the $130 mark. At these levels, the 136 million shares valued equity of the business around $18 billion, as the company operated with nearly half a billion in net debt as well. With sales trending at $2.2 billion and earnings seen between $3.50 and $4.00 per share, valuations were demanding at around 8 times sales and 32-38 times earnings, very steep multiples.

The investment thesis was furthermore complicated by a $133 per share, or $6.5 billion deal to acquire CMC Materials, in a transaction set to add a supplier of advanced materials to the semiconductor sector with a comprehensive set of solutions. That deal was set to contribute about $1.2 billion in sales with EBITDA margins around 30% being similar to the margins reported by Entegris.

Pro forma of the deal, I pegged sales at $3.4 billion, and EBITDA near $1.1 billion (including an estimated $75 million in synergies). Net debt would come in around 4.0 times EBITDA, as leverage made investors a bit cautious with shares down 6% on the back of the transaction announcement early in 2022.

What Happened?

Shares of Entegris have fallen alongside the market, and certainly technologies and semiconductor names during 2022. Shares fell to the $60s in the autumn after the company closed on the CMC Materials deal in July.

In February of this year, the company reported its fiscal 2022 results which are a bit hard to read of course. Full year sales were reported at $3.28 billion, nearly a billion higher than the year before, aided by the CMC deal as well which closed during the fiscal year of course. Net debt was reported at $5.2 billion and with adjusted EBITDA seen just shy of a billion, leverage ratios were clearly high (and even higher than expected). Even if I annualized a $261 million EBITDA number for the final quarter (on $946 million in sales), leverage ratios were uncomfortably high.

The company provided a not so inspiring first quarter outlook with sales seen at $895 million, plus or minus $15 million, with EBITDA seen between $214 and $231 million, making leverage ratios very high.

Shares traded in the $70s amidst the lackluster results, but they spiked to $90 in May upon some good news. On the 10th of May, Entegris announced that it has reached a deal with Fujifilm to sell the Electronic Chemical business in a deal valued at $700 million. These activities were acquired with the CMC deal and given their $360 million sales contribution, it is evident that about a 2 times sales multiple has been paid for these activities.

A day later the company announced it first quarter results as a $922 million sales numbers was stronger than guided for, as this certainly applied to EBITDA which was reported at $252 million. Net debt was down to $5.1 billion, and will fall towards $4.4 billion upon the Fujifilm deal. With EBITDA trending around a billion here, leverage ratios come down a bit, but remain higher than seen at the time of the deal announcement.

This momentum is not necessarily expected to be repeated in the second quarter, with sales seen between $870 and $900 million, with adjusted earnings of $0.53-$0.58 per share looking a bit soft versus the first quarter profit of $0.65 per share (based on non-GAAP accounting).

With 150 million shares now trading around the $90 mark, the company commands a $13.5 billion valuation and about an $18 billion enterprise value, if we include pro forma net debt. With sales trending at $3.7 billion, the company trades around 5 times sales, revealing that the Fujifilm deal looks cheap at 2 times sales, although the margin profile has not been shared.

Needless to say, the price tag looks a bit soft as the company announced an $89 million impairment charge related to this deal alongside the first quarter earnings report.

What Now?

The reality is that despite a 30% pullback since the CMC announcement early in 2022, I am still cautious. The company made a deal at the top of the market, leverage is higher than feared (amidst some pressure seen in the business) and the company is now resorting to apparently a cheaper divestment in order to address leverage.

With adjusted earnings now trending at just $2-$3 per share, earnings multiples are sky high as the company still has quite some work to do, as quite frankly I am not sharing the huge optimism seen in the shares over the last couple of days.

While I like the long-term strategic rationale behind the deal, I am still cautious right now. I'm looking to update the investment thesis later in the year.

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