VSH - Vishay Intertechnology: It Is No Use Going Against The Tide

Summary

• VSH has done better than most in what can be described as a tough 2022, but not when viewed in the long run.
• The stock’s lack of progress stands out, especially since VSH has a number of strengths, which include solid growth and low valuations.
• There may be no signs of it at the moment, but the market seems convinced the numbers are destined to get worse.
• Long VSH is not without its merits, but the stock’s previous track record suggests it is unlikely to prove worthwhile.

Vishay Intertechnology ( VSH ) does not have too much to complain about given the circumstances. Business is still going strong, unlike some of its peers in the semiconductor industry. The stock has also outperformed this year, comparatively speaking, having fallen much less in comparison to most other companies. However, while some may see all of this as a reason to be bullish, others are unlikely to agree. The bull case for VSH is not as clear-cut as it needs to be. Why will be covered next.

VSH has outperformed at a difficult time

It's true times have been tough for stocks, but some have still done better than others in 2022. One of the sectors hardest hit has been the semiconductor sector. For instance, the iShares PHLX Semiconductor ETF ( SOXX ) has lost 35% YTD. In comparison, the SPDR S&P 500 ETF ( SPY ) has lost 19% YTD, which is significantly less.

VSH falls under the semiconductor sector as a leading supplier of discrete semiconductors. However, VSH has not fallen as much as other semis. VSH has lost 14% YTD, meaning it has outperformed this year. The stock did suffer a sizable drop in the first two months of 2022, but it has since shown to be fairly resilient given the circumstances.

Many companies have seen their stock sink in recent months with all the turmoil, but VSH has basically gone sideways. This is quite an achievement with everything going on that have weighed on stocks. At the same time, it's worth noting that the stock has not actually done all that well in recent years. The stock has gone in circles in the last five years.

The stock is currently in the $18-19 price region, a level it reached back in 2017. It's also a region VSH has revisited on numerous occasions in the last five years. The stock has essentially gone sideways, going up and down, only to wind up back to where it began. If anyone put their money on VSH in the preceding years, they probably have little to nothing to show for.

The company has done better than the stock

Keep in mind that stocks have soared higher in the last five years, notwithstanding the decline this year. For instance, SOXX has still gained over 126% in the last five years even though it has lost a third of its value in 2022. In contrast, VSH has gained a meager 4% in comparison. The relatively poor performance of the stock stands out.

It's after all not as if VSH has done nothing to warrant a higher stock price. The top and the bottom line have made substantial gains in the preceding years. While the stock has stalled, earnings per share, for example, have grown at a CAGR of 35% in the last five years, which is nothing to sneeze at. In fact, a look at the most recent quarterly report shows that business is still going strong.

VSH beat estimates for the top and the bottom line once again. Q2 revenue increased by 5.4% YoY to $863.5M, a record high. GAAP EPS increased by 21.9% YoY to $0.78 and non-GAAP EPS increased by 34.4% YoY to $0.82. Adjusted EBITDA was $198.9M in Q2 FY2022, up from $163M in Q2 FY2021. Cash and short-term investments reached $947M at the end of Q2. Book-to-bill remains above one.

Note that EPS growth got a boost from share buybacks. VSH purchased 1.4M of its own shares for $26.3M in Q2. On the other hand, it's worth mentioning that the record-setting performance was achieved in spite of COVID-19 lockdowns in China, which put two key facilities out of commission for over two months. These facilities were unable to contribute during this time.

The quarterly numbers were also negatively affected by fluctuations in foreign exchange rates. Revenue, for instance, would have increased by 3% QoQ and 10% YoY if not for forex. In other words, the quarterly numbers could have been much better than they turned out to be in the end. The table below shows the numbers for Q2 FY2022.

Source: VSH Form 8-K

Guidance calls for Q3 FY2022 revenue of $860-900M, an increase of 8.1% YoY at the midpoint. It would also be the fourth consecutive sequential increase in quarterly revenue and the 8th out of the last 9 quarters.

Guidance did not extend beyond Q3, but VSH remains upbeat about the outlook longer term. While some softness has popped up in some market segments, strong demand in other segments has more than made up for it. Overall demand remains strong. From the Q2 earnings call:

"For the entire year, we again expect a solid performance concerning free cash. Vishay continues to operate under extraordinarily good economic conditions, orders and backlogs at historically high levels. All regions remain principally strong with a currently not transparent situation of the Chinese market. Most of the market segments do very well whereby there is an exception computers and smartphones. Major shortages of supply continue to exist for many product lines."

A transcript of the Q2 FY2022 earnings call can be found here .

However, it's worth mentioning that analysts, or at least some of them, are not as confident about the outlook as VSH appears to be. Consensus estimates call for non-GAAP EPS of $2.57-3.03 in FY2022, an increase of 10.8-30.6% YoY, but this is predicted to decline to $2.01-2.99 in FY2023. While VSH itself might not be calling for a downturn, some are anticipating one for VSH.

There is reason to believe this hypothesis is plausible. It's true EPS has grown at a CAGR of 35.5% in the last 5 years, but this drops to 9.3% in the last 10 years. VSH has done well in recent years in terms of earnings growth, but it was not always this way. The semiconductor industry is after all cyclical and the upturn in earnings in recent years may be followed by a downturn in subsequent years.

Note that while VHS itself is not seeing much of a deterioration in quarterly earnings, other semis are. A number of them have lowered their earnings outlook due to weakening demand. Weak guidance from these companies has affected the entire industry, including those who are still in great shape. It's also possible VSH may yet experience a downturn in earnings growth, which some seem to believe could happen as soon as next year as reflected in analysts' estimates.

According to WSTS, the semiconductor market is expected to grow by 13.9% YoY in 2022, down from 26.2% in 2021. Growth is expected to keep decelerating with the market predicted to grow by 4.6% in 2023. The market for discrete semiconductors, which is more relevant to VSH, is expected to grow by 10.1% in 2022 and 3.9% in 2023. The market is still growing, but it is slowing down fast.

VSH is priced for a downturn

This anticipated downturn helps explain why VSH trades at a discount. Not only is VSH cheaper on average, but it also trades at lower valuations than most semis. The table below shows the multiples for VSH. For instance, VSH has an enterprise value of $2.4B, equal to 3.44 times EBITDA on a forward basis and 3.28 times EBITDA on a trailing basis. The five-year average is around 5x and the sector median is 12-13x. If earnings decline as some expect them to, multiples could revert to their mean.

Source: Seeking Alpha

Investor takeaways

VSH has what it takes to draw interest. The stock is fairly cheap with multiples where they are. The stock is valued at 1.46 times book value for example. Earnings growth has been solid for some time and it continues unabated. The balance sheet is in good shape. If someone is looking for a stock with double-digit growth at a good price, then VSH may just be what people are looking for.

I am nevertheless neutral on VSH. VSH probably deserves better, but the reality is that the stock has not really delivered in quite some time if you are a bull. Earnings continue to grow, but the market seems convinced that VSH will not be able to keep it up. Earnings growth has moved above the long-term trendline in recent years and the market seems to believe it is only a matter of time before earnings growth returns to levels that are more in line with historical rates. This would explain why the stock has lagged behind so much compared to most stocks, even though earnings have greatly improved in the last five years.

Some may want to bet on this changing, but the odds are not in favor of it. If the stock could not get going at the best of times, then it's hard to see how things will get better when conditions are not as favorable. The semiconductor market is expected to decline for a host of reasons, including a weakening global economy, which means the quarterly numbers in the near to medium term will likely not be as good as before.

If the strong numbers in the last few years could not push the stock higher, then it's hard to imagine how worse numbers will be able to achieve a better result. This includes last year when the stock had a bunch of tailwinds in its favor, including massive fiscal and monetary stimulus that boosted the stock market, strong earnings growth, a booming market for semiconductors and the huge interest in semiconductor stocks. If the combined force was not able to keep the stock going, then it's unlikely to happen when most if not all of these tailwinds are no longer there.

Bottom line, there is no point in going against the tide. VSH has its strong points, but they have not been enough to get the stock going. The stock has stayed flat through it all. Betting on the stock has not proven worthwhile in years. Odds are any attempts to go long VSH at this point will turn out to be no different as well.

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