Entegris: Possibly Mistimed CMC Materials Acquisition (ENTG)

Entegris (NASDAQ:ENTG) is in a difficult spot. The firm continues to be rising at a strong tempo and market demand stays agency in the mean time, however there are indicators that won’t maintain true for an excessive amount of longer. At the identical time, ENTG has made a promising guess on the longer term with the acquisition of CMC Materials or CCMP, however it wanted to leverage itself at what might turn into a nasty time. Why might be coated subsequent.

ENTG continues to be doing high-quality

At the second, ENTG can nonetheless depend on a wholesome market as proven by its most up-to-date quarterly report. Q2 income elevated by 21.2% YoY to $692M. GAAP EPS elevated by 12.3% YoY to $0.73 and non-GAAP EPS elevated by 17.7% YoY to $1.00. Adjusted EBITDA was $207.4M in Q2 FY2022, $206.2M in Q1 FY2022 and $174.2M in Q2 FY2021. The desk under exhibits the numbers for Q2 FY2022.

Note how the underside line didn’t enhance as a lot as the highest line with margins decrease than earlier than. In reality, ENTG missed consensus estimates and its personal steering of $1.02-1.07 for non-GAAP EPS. It’s subsequently value mentioning that fluctuations in international alternate charges lowered non-GAAP EPS by $0.15. Sales and gross margin might have been increased if not for foreign exchange.

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Source: Entegris Form 8-K

ENTG lately completed the acquisition of CMC Materials or CCMP, which implies the Q2 report is the final one for ENTG as a standalone firm. As a consequence, steering issued was much less detailed than traditional with no EPS given. Still, steering requires Q3 gross sales of $1.00-1.04B with contributions from each ENTG and CCMP included.

As a reference, gross sales in Q3 FY2021 stood at $579.5M earlier than the CCMP acquisition. Furthermore, ENTG sees FY2022 gross sales ending up at $4B+, a rise of over 16% YoY on a professional forma foundation. From the Q2 earnings name:

“Now transitioning to our outlook for the full year, the legacy Entegris business is tracking in line with our previous expectations for 2022, driven by very strong demand for our products and solutions and continued excellent execution by our supply chain teams. We also expect the positive momentum of the legacy CMC Materials business will continue into the second half of the calendar year. Putting it all together on a pro forma basis, excluding CMC’s wood treatment business, we expect revenue for the combined company to exceed $4 billion and grow in excess of 16% in calendar 2022. And we expect pro forma EBITDA of the combined company to be approximately 30% of revenue in calendar 2022.”

A transcript of the Q2 FY2022 earnings name could be discovered right here.

Management stays upbeat in regards to the state of the market because it pertains to demand.

“I would say, the chip demand and CapEx activity is expected to remain pretty strong through 2022. And certainly, the demand for our products is expected to remain at record levels because of the growing importance of what we do for our customers. So that’s the headline. And the additional data point I will share with you is that today, at Entegris, we still have an unconstrained demand that is higher than our guidance. So even if the industry slows down a little bit, we should be able to carry our momentum through the balance of the year.”

All in all, ENTG is in good condition, a minimum of as this cut-off date.

Why the CCMP acquisition might have come at a nasty time

ENTG wanted $5.7B to amass CCMP with $3.8B in money. In order to finance the deal, ENTG wanted to tackle debt by a number of transactions. In complete, ENTG added $5.3B in debt, bringing gross debt as much as $6.1B, giving ENTG a gross leverage of 5.1x. While the Q2 report precedes the closing of the CCMP acquisition, some adjustments can already be seen within the steadiness sheet.

For occasion, money and equal jumped to $2,743.2M in Q2 FY2022, up from $352.7M in Q1 FY2022 and $401M in Q2 FY2021, because of $2,527.3M from debt proceeds. At the identical time, long-term debt jumped to $3,408.8M in Q2 FY2022, up from $937.3M in Q1 FY2022 and $936.4M in Q2 FY2021.

The steadiness sheet has deteriorated with ENTG needing to tackle loads of debt. ENTG will spend years paying down the debt and the curiosity on that debt. This might not appear to be an excessive amount of of an issue in the mean time with earnings on the rise, however that might change sooner or later. The semiconductor market continues to be rising, however it has slowed down significantly.

For occasion, a recent report from Gartner predicts international semiconductor income will develop by 7.4% YoY in 2022, down from the 13.6% anticipated earlier within the yr. In comparability, semiconductor income grew by 26.3% YoY in 2021. Furthermore, income is projected to shrink by 2.5% YoY in 2023. While some market segments are doing okay, the market for semiconductors generally is slowing down, particularly relating to smartphones and PCs.

Such a growth might minimize each methods for ENTG as primarily a provider of supplies for use within the manufacture of semiconductors. On the one hand, ENTG believes it stands to profit from larger wafer content material because the business strikes in direction of extra superior nodes. On the opposite hand, not all purposes require modern nodes. For occasion, smartphones and PCs are usually among the many first adopters of modern nodes and each are seeing slowing demand.

Companies like Nvidia (NVDA) and Qualcomm (QCOM) are a few of the main adopters of modern nodes and so they have all issued weak forecasts lately. If the business slows down, earnings at ENTG might come below stress. Slowing PC and smartphone demand might end in decreased funding in modern nodes, which might negatively influence ENTG.

It would additionally come at a time when ENTG has levered itself by taking over a considerable quantity of debt to amass CCMP. So in that sense, the current acquisition might backfire on ENTG. ENTG acquired CCMP as it’s seen as useful and whereas that will turn into true in the long term, it might additionally trigger issues within the medium time period, relying on the extent of the downturn within the semiconductor business.

In addition, it’s value mentioning {that a} downturn might additionally come at a nasty time when it comes to the place valuations are. ENTG might not trade at lofty valuations, however they’re on the excessive aspect. For occasion, the stock is valued at 7.4 occasions ebook worth, which is greater than double the sector median at 3.3x. The desk under exhibits the multiples for ENTG. Note that the multiples have but to incorporate contributions from the current CCMP acquisition.

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Source: Seeking Alpha

The stock is in a holding sample

The stock has been going sideways kind of for the final three months as proven under. The stock is off the lows for the yr, however it’s nonetheless down 24% YTD and it appears to be struggling for path. The charts could also be within the strategy of forming a symmetrical triangle, a consolidation sample. The stock is more likely to proceed to maneuver sideways till the stock breaks by both the decrease or the higher trendline.

A break increased or a break decrease are each attainable, however the latter could possibly be the extra seemingly end result. One might argue the stock is in a downtrend that began in late 2021. The stock has moved off the lows, however it has but to indicate that the development just isn’t down. If the development is certainly down as has been the case for the higher half of an entire yr, then a transfer decrease may be in retailer.

Investor takeaways

CCMP enhances ENTG and will turn into an excellent acquisition in the long term. However, within the extra instant future, the CCMP acquisition might have come at an inopportune time. ENTG took on loads of debt to finance the acquisition which must be paid again. It might not be an issue presently with earnings nonetheless robust, however that might change down the highway.

Earnings are nonetheless rising at ENTG and demand nonetheless seems to be in good condition. But there are clear indicators the semiconductor business is getting weaker after a number of years of growth. The semiconductor market continues to be rising in 2022, however it might begin to contract as quickly as subsequent yr. ENTG might discover itself ready the place earnings are below stress as a consequence of adjustments within the semiconductor market, simply when it wants to start servicing the billions of debt it took on at what might have been an inopportune time.

I’m impartial on ENTG as acknowledged in a earlier article. Long ENTG just isn’t with out benefit. ENTG nonetheless has good prospects in the long term and the quarterly numbers look high-quality. ENTG ought to be high-quality for the remainder of FY2022 with gross sales more likely to find yourself at $4B+ and EBITDA margins of a minimum of 30%. On the opposite hand, what occurs past 2022 is much less clear.

Clouds appear to be gathering on the horizon with the market for semiconductors slowing down. Multiples are on the excessive aspect for a semiconductor title. ENTG could possibly be within the early innings of a downturn that might end in earnings happening. ENTG wanted to leverage itself, however the timing might not have come at one of the best of occasions. Add all this collectively and it turns into clearer as to why lengthy ENTG is a extra iffy proposition than it seems at first.