MKSI - MKS Instruments: The Upcoming Analyst Day Could Shake Things Up

2023-11-22 01:30:59 ET

Summary

• MKSI stock has done much better in November than the past few months with a gain of over 20% for a number of reasons.
• While some can be said to have receded, MKS Instruments is still dealing with a number of headwinds that could send the stock lower.
• The Company is expected to hold another Analyst Day in December, which could serve as a catalyst if current forward projections are revised.
• The stock has staged a strong rebound, but whether MKSI is in the clear remains very much up in the air at this point.

MKS Instruments ( MKSI ) has slowed down in the last few days, but that does not take anything away from the powerful rally the stock went through in November. The stock went into a tailspin heading into the month of November, in part due to recent events in Israel, but the arrival of the Q3 FY2023 report on November 1 helped set off a rally after the stock hit a new 52-week low, along with some assistance elsewhere. However, the recent moves may be nothing more than a relief rally and more needs to happen for MKSI to get back to old highs. Why will be covered next?

Why MKSI bounced in November after falling to a 52-week low

A previous article from September 8 rated MKSI a hold after observing how the stock had see-sawed pretty much all year. The stock found itself close to a trendline that had provided it with a measure of support in the preceding months, but the stock, being close to the trendline, was at risk of losing this support if the stock did not stop falling like it had in the preceding weeks.

As it turned out, MKSI did fall below the trendline and with support out of the way the stock proceeded to decline for the next two months as shown in the chart below. The drop in the stock accelerated in early October after the violent events in Israel with the country home to a number of production facilities of MKSI.

The stock continued to drop until it hit a new 52-week low of $63.44 on November 1 but then staged a rally, which saw the stock gain over 20% in November to bring down YTD losses to 8.7% with the stock priced at $77.35 as of November 20. This rally was assisted by a number of factors like the stock being heavily oversold after dropping for nearly three straight months, which cut the stock's value by almost half.

In addition, the situation in Israel has not escalated like some thought it might, at least thus far. MKSI itself has not been directly affected by events in Israel and operations have not been disrupted. However, the latest quarterly report also played a role, which is why the rally started on November 1 since the Q3 report was released on that day.

The Q3 FY2023 report was not as bad as some might have thought after recent events

The Q3 report was actually a mixed bag, but MKSI did manage to blow past earnings estimates. Consensus estimates were looking for non-GAAP EPS of $1.02, but MKSI blew past estimates by earning $1.46 on revenue of $932M. In terms of GAAP, net income was $39M or $0.58 per share. Adjusted EBITDA was $235M, down QoQ and YoY.

Note that the outsized GAAP loss of $1,769M or $26.47 per share in Q2 FY2023 was the result of an impairment charge of $1,827M due to weak industry conditions. Q3 FY2022 was also the first quarter with at least partial contributions from the Atotech acquisition . Keep in mind Q3 FY2023 benefited from revenue that got pushed out due to the ransomware event from earlier in the year. If not for this, Q3 revenue would have been about $30M less. The table below shows the numbers for Q3 FY2023.

Source: MKSI Form 8-K

MKSI leveraged the balance sheet to finance the Atotech acquisition, but it is making progress in reducing its debt, although there is a lot left to do. MKSI finished Q3 with gross debt of $5B, partially offset by cash, cash equivalents, and short-term investments of $860M. With so much debt, net interest expense amounted to $84M in Q3.

On the other hand, guidance was less than expected. Guidance calls for Q4 FY2023 revenue of $800-880M, a decline of 22.6% YoY at the midpoint. The forecast expects non-GAAP EPS of $0.58-1.12, a decline of 57.5% YoY at the midpoint.

The next few quarters are seen to be flattish

With the latest guidance, MKSI is projected to end up with revenue of $3,570M and non-GAAP EPS of $4.10 in FY2023. In comparison, MKSI earned $9.97 on revenue of $3,547M in FY2022 and that's without Atotech for the most part. It also implies H2 FY2023 will not be better than H1 FY2023 as previously called for by MKSI since H2's revenue of $1,772M is less than H1's $1,798M. This can be attributed to weak demand. From the Q3 earnings call:

Based on the midpoint of our guidance, we now expect revenue in the second half of 2023 to be slightly lower than the first half, compared to our prior expectation that it would be slightly higher than the first half. This is primarily due to our expectation of short term customer inventory workdowns in our semiconductor market."

A transcript of the Q3 FY2023 earnings call can be found here .

While guidance did not extend beyond Q4, MKSI had some thoughts about the short-term outlook.

I think the industry is kind of looking at first half is relatively muted, kind of the same as kind of the second half of 2023, and then I think after that I think there's varying opinions. So that's what I would say is that we're reading the same kind of things you are and it looks pretty flat for the next few quarters to us as well."

Revenue is expected to stay flat for the next few quarters, at least as far as semiconductors are concerned.

Are better times ahead for MKSI?

MKSI has been hit harder during the industry downturn than most. There are several reasons why. Part of it has to do with the debt that MKSI took on just as the cycle turned. The ransomware event did not help, nor did the outbreak of hostilities in the Middle East. However, another reason relates to the exposure MKSI has to market segments like NAND flash memory, which has been among the hardest hit, and some could argue the hardest hit, during the current downturn.

However, there are signs the NAND market is starting to recover. There are reports NAND manufacturers are planning to raise prices due to improving demand. It remains to be seen whether this continues, but it is a positive sign for MKSI that perhaps the worst has passed. This could help MKSI sometime later next year.

It's also worth mentioning that MKSI is now available at lower multiples than most semis. For instance, MKSI trades at 19 times forward non-GAAP earnings with a trailing P/E of 15, below the median of 22x and 20x respectively. The table below shows some of the multiples MKSI trades at.

Source: Seeking Alpha

Will MKSI stick with its projections?

MKSI is expected to hold another Analyst Day before the end of 2023 since the last one was held almost a year ago. Onlookers will be curious to know if MKSI sticks to the targets previously laid out or whether it sets new targets. Keep in mind that MKSI has suffered a number of setbacks this year, including a downturn that has been worse than many expected it to be last year. Non-GAAP EPS, for instance, is projected to contract by almost 60% YoY in FY2023.

Assuming MKSI does not revise targets, then there is an argument to be made that MKSI is trading below fair value. Fair value is subjective, but if we assume MKSI manages to grow non-GAAP EPS to more than $13 a share by FY2027 as laid out in the most recent Analyst Day Presentation, then earnings would need to grow at around 25.5% on average per year in order for EPS to hit at least $13 by FY2027 and with TTM EPS of $5.26. According to Peter Lynch, this suggests fair value for MKSI is about $134.

Keep in mind this number assumes MKSI sticks with its current target of more than $13 in EPS by FY2027. This target may be outdated as a lot has happened since the target was announced. MKSI could drop the $13 target in light of what has happened this year, but keep in mind MKSI earned $11.38 as recently as FY2021 and that was before the addition of Atotech. It's not impossible for MKSI to get to $13 by FY2027, but it would require some major changes, especially a revival of demand in the semiconductor industry.

Investor takeaways

There are still six weeks or so left to go, but 2023 has not been kind to MKSI. MKSI has had to deal with a number of setbacks in 2023, including a downturn that has been more severe than anticipated, a ransomware event, hefty charges, major shareholders jumping ship on MKSI, and, most recently, a war that has yet to be resolved. All this contributed to the decline in the stock. Unlike many semis, MKSI is down for the year.

However, things have been looking up for MKSI lately and the stock has rallied in November. Guidance was soft, but the Q3 FY2023 report on November 1 was not as bad as some may have feared after the recent events in Israel. Still, MKSI was due for a relief rally after the stock fell for close to three months.

The strong gains in November notwithstanding, MKIS still has to deal with a number of headwinds that have not gone away. While some issues like the ransomware event have been resolved, most issues have yet to find a solution. A wider war cannot be ruled out, which means MKSI could still get hit. The industry downturn continues.

Demand remains down, which affects MKSI's ability to improve the income statement and balance sheet, both of which have declined in recent quarters. It is possible demand will get better next year, and there are some positive signs out there, but it is too early to say MKSI is on the verge of an upturn.

There is also another Analyst Day likely to be held in December, which could serve as a catalyst for the stock, both to the upside or to the downside. A lot will depend on whether MKSI sticks with its current projections, which call for EPS of $13 by FY2027. A lot has happened this year, which may convince MKSI to scale back projections. The market may be hoping MKSI sticks with present projections, which could help the stock, but the possibility of a downward revision should not be dismissed.

I am neutral on MKSI in light of everything going on. MKSI has been rather hot in November, but whether it can sustain the rally remains to be seen. The rally benefited from some favorable circumstances that won't be present going forward. There is still a lot left that needs to be rectified at MKSI. It's also possible for things to deteriorate. So while MKSI has done better lately, whether this continues remains up in the air.

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