Entegris Is Managing Reorganization Amidst EPS Growth Expectations (NASDAQ:ENTG)

Entegris, Inc. (NASDAQ:ENTG) appears to be receiving a lot of attention because of recent earnings growth expectations for 2024 and price momentum increases. I believe that the total amount of recurrent sales is a good reason to follow the stock. In addition, careful research of ENTG’s corporate documents reveals that the company is going through many changes that include severance costs and sale of divisions, which may facilitate deleveraging the balance sheet. In my view, we could see significant improvements in future FCF growth and FCF margin thanks to these efforts. There are clear risks coming from global competition, import tariffs, and the total amount of debt. With that, I think that ENTG does trade undervalued.

Entegris

Entegris is a leading provider of advanced materials and solutions for the semiconductor and high-tech industries. Its wide range of capabilities helps customers improve productivity and performance in advanced manufacturing environments. With the rise of emerging technologies such as artificial intelligence and connected devices, I believe that the demand for semiconductors is on the rise.

Considering that Entegris’ revenue comes from all over the world, including North America, Taiwan, or China, I believe that Entegris is well positioned to benefit from the demand for new advanced materials and solutions.

Entegris is positioned as a leader with a complete portfolio of electronic materials, excelling in materials science and purity. These capabilities are expected to drive significant growth, taking advantage of the growing semiconductor market.

Entegris operates globally, marketing its products through a direct sales force, strategic distributors, and independent partners in key semiconductor markets. With approximately 783 sales and marketing employees worldwide, the company stands out for its strong industry relationships and unique capabilities.

The company’s approach includes collaborations during the product design stage, allowing it to introduce new solutions. Technical and application support plays a crucial role in the sales efforts, addressing specific customer challenges. With service centers and laboratories in key markets, Entegris guarantees rapid response and comprehensive support.

Better Quarterly Earnings Than Expected, Earnings, FCF Expectations, And Recent Momentum Growth

Given the most recent quarterly results, I believe that Entegris may bring significant attention in the coming months. Management noted EPS GAAP Actual larger than expected and quarterly revenue better than prevised.

In addition, the expectations for 2024 include EPS growth, double-digit FCF growth, and net income growth. I believe that these expectations could bring significant demand for the stock, and may enhance the stock valuation.

Furthermore, given previous EPS results, which were better than expected, I think that it is likely that new EPS are also better than anticipated by analysts. In this regard, I invite investors to have a look at the following previous financial figures.

With that about the earnings expected for 2024, there is already a significant amount of stock price momentum going on, which is also worth noting. In the last six months and three months, momentum growth appears significantly larger than the sector median growth in the last three months and six months. There seems to exist some investors out there buying shares at this point in time.

Balance Sheet – Total Amount Of Debt Is Not Small

As of December 31, 2023, Entegris reported $456 million in cash, total current assets of $1.9 billion, and a current ratio of more than 3x. I do not believe that there is a liquidity issue here. I believe that the problems, if there are any, come from the long-term debt and the total number of liabilities.

Total assets stand at close to $8 billion, and long-term debt is close to $4.5 billion. The company appears to be paying its total amount of debt thanks to sale of assets and divisions. In my view, if Entegris successfully lowers the net debt/EBITDA figure, we will see stock price increases.

Cost Of Capital Stands At Close To 3.6% And 5.95%

During 2023, the company adjusted its existing credit agreement through the first and Second Amendment, refinancing term B loans with new tranches, reducing interest margins. The company also repaid $1.1 billion of outstanding borrowings on the new Term Loan B and $135.0 million total on the bridge credit facility complied with all financial obligations until December 31, 2023. The company maintains commitments under the revolving fund of $575.0 million. Senior notes include interest rates close to 3.6% and 5.95%. Hence, the cost of capital stands at about 3.6% and 5.95%.

Research And Development Could Bring New Products, Patents, And FCF Growth

Entegris prioritizes technology for commercial success, allocating significant resources to research and development, with approximately 1,361 employees dedicated to this area. The strategy focuses on balancing short-term market needs with long-term investments. It complements internal efforts with licenses and acquisitions of external technologies.

Its project portfolio focuses on improving technological platforms for semiconductors and advanced processing, collaborating closely with clients. With development capabilities in key locations, the company employs sophisticated methodologies and collaborates with renowned academic institutions to expand its reach and access innovative ideas, ensuring continued innovation in its products and solutions.

Under my best-case scenario, I assumed that investments in research and development would lead to generation of new patents, new products, or improvement in the FCF margins.

The Advanced Materials for Electronics Market Could Grow At 7.4% CAGR, Which May Push Entegris’ Net Sales Growth

According to market researchers, the advanced materials for electronics market is expected to grow at close to 7.4% CAGR from now to 2031. In my best-case scenarios and my worst-case scenario, I assumed that net sales growth could be close to this figure or a bit more because of potential inorganic growth, the results of R&D efforts, and new products.

The Advanced Materials for Electronics Market is predicted to reach US$ 57.8 billion by 2031. According to market forecasts, the market is expected to grow at a CAGR of 7.4% through 2031. Source: Transparency Market Research

Recurring Revenue May Accelerate Demand For The Stock

With 75% of 2023 revenue being unit-driven or recurring, Entegris may bring the interest of many investors out there. Financial investors will most likely appreciate that with that level of recurring revenue, future net sales growth may not be that volatile. Besides, I believe that future net sales may be more stable and predictable than that of other peers without recurrent net sales. Under my best-case scenario, I assumed that future net sales growth may be very stable in the coming years thanks to the recurrent revenue.

Approximately 75% of our revenue during 2023 was unit driven or recurring in nature, from products repeatedly consumed as a result of the semiconductor manufacturing process. As a result, our revenue is generally more impacted by overall global semiconductor demand and global GDP growth, rather than the sales of semiconductor capital equipment, which has historically been more cyclical. Source: 10-k

Sale Of Divisions Could Continue To Bring Cash In Hand, And Enhance The Balance Sheet

In 2023, I saw many press releases related to sale of divisions, which, I believe, enhanced significantly the company’s balance sheet. In my view, the total amount of net debt decreased partly because of the cash received in these transactions.

According to the last 10-k, the company sold QED Technologies International, Inc., and the Electronic Chemicals business, which represented a lot of cash in hand.

On March 1, 2023, the Company completed the sale of QED Technologies International, Inc. to an affiliate of Quad-C Management, Inc. Source: 10-k

On October 2, 2023, the Company completed the sale of its Electronic Chemicals business to FUJIFILM Holdings America Corporation for cash proceeds of $737.1 million, or net proceeds of $675.2 million, subject to customary final post-closing adjustments. Source: 10-k

Given the recent transactions, I think that Entegris is really making a lot of efforts to reorganize the balance sheet. In this regard, I also think that management may try a merger with a similar company or small acquisitions to enhance its EBITDA generation. If debt holders approve new transactions, I do see potential here. Let’s keep in mind that the company executed acquisitions in the past.

We completed the acquisition of CMC Materials, Inc. Source: 10-k

Severance Costs And Other Efforts During 2022 And 2023 May Bring Financial Flexibility In The Future

Entegris recently reported the realignment of its business units, as well as a significant number of severance costs and restructuring costs.

In the third quarter of 2023, the Company realigned its segments into three reportable segments discussed below, which align with the key elements of the advanced semiconductor manufacturing ecosystem. Source: 10-k

Severance costs commenced in Q3 2022, and restructuring costs started in Q1 2023. Under my base case scenario, I assumed that these restructuring expenses could accelerate FCF margin growth and EBITDA growth in the coming years.

My Best-Case Scenario Implied A Valuation Of $185 Per Share

Under this scenario, I assumed that reorganization efforts, sale of divisions, R&D efforts, and recurrent revenue will most likely bring net sales growth and FCF margin growth. I also took into account previous cash flow statements. My numbers are not really out of the box, and I think that they are conservative.

I estimated that by 2034 the company will have revenue of $13.954 billion, thus presenting a revenue growth of around 7.69% y/y. I also assumed a cost of sales of $6.255 billion, which leaves us with a gross profit of $7.698 billion. From this profit, we must deduct certain expenses, such as selling, general, and administrative expenses of $2.093 billion, and engineering, research, and development expenses worth $877 million, while the amortization would be close to $1.125 billion.

Additionally, I took into account that goodwill, impairment loss, and the gain on termination of alliance agreement are zero since these are non-recurring items. Finally, with total expenses of $4.097 billion, 2034 operating income would be close to $3.601 billion, accompanied by an operating margin of 25.81%.

Moreover, with other expenses, such as the interest expense close to $1.789 billion, I added the interest income of -$73 million, plus the other expense, net of $1 million, which leaves us with a total other expenses of $1.278 billion and net income of $2.323 billion, providing an operating margin of 16.65%.

If we also assume a payout of 33.33%, the 2034 dividend payment would be close to $766 million, while the NPV of future dividend payments would be around $2.010 billion. If we also include a WACC of 9.10%, which I believe is conservative, and exit PE ratio of 29x, my results would include a NPV of terminal value of $25.845 billion. Added to the NPV of dividend, it gives us the total valuation of close to $27.855 billion, which implies a final price per share of $185.

There Are Many Risks

Entegris faces significant risks in the semiconductor industry, characterized by cyclical cycles and sudden crises. Reliance on large customers, with the top ten representing 43% of sales, increases vulnerability to order cancellations or reductions.

Fluctuations in demand, seasonal changes, and the geographic concentration of customers in Taiwan, Korea, Japan, China, and the US also create risks.

The need to maintain flexibility and efficiently manage production capacity during recessions poses challenges. Industry consolidation and exposure to regulations and geopolitical trends add complexity and volatility to Entegris’ risk landscape.

The Market Is Competitive

In my opinion, the market in which the company operates is highly competitive, where quality, technical knowledge, and solution time are crucial. It competes favorably thanks to its broad product offering, investment in research and development, robust infrastructure, advanced quality control systems, and close collaboration with customers.

Although the company maintains long-standing relationships with manufacturers, it faces significant competition from other companies with established relationships. The competitive landscape ranges from multinationals to regional companies. Despite not having direct global competitors across its entire product range, the company faces specific challenges in particular areas, competing with notable companies such as Pall Corporation, Shin-Etsu Polymer Co. (OTCPK:SHECY), or L’Air Liquide (OTCPK:AIQUF), Linde plc (LIN).

My Worst-Case Scenario

Under this scenario, most initiatives reported by the company may not be successful, and the company may deliver lower net income growth than that in the previous case scenario. As a result, the WACC may be a bit higher than that in the best-case scenario, and the PE ratio may also be a bit higher than that in the previous case.

In a less positive case, I assumed 2034 total revenue of $11.642 billion, which gives a revenue growth of close to 6.53% y/y. I also included the 2034 cost of sales of $5.170 billion, thus leaving us with a gross profit of $6.472 billion.

We would also deduce the expenses, which consist of selling, general, and administrative expenses of $1.745 billion, plus engineering, research, and development expenses of $728 million, in addition to the amortization that will be around $956 million. In sum, total expenses would be close to $3.431 billion, leaving us with an operating income of $3.041 billion, thus representing the operating margin of 26.12%.

Now, with interest expense of $1.524 billion, accompanied by the equity in net loss of affiliates of $23 million, my numbers provide a result of total other expenses close to $1.077 billion, which if we deduct it from the operating income gives the net income of $1.964 billion.

If we assume a payout of 33.33%, the 2034 dividend payment would stand at $654 billion. Hence, I obtained a NPV of dividend payment of $1.502 billion with a WACC of 10.10%. I expect that worse financial figures may elevate the cost of equity.

Also, with an exit PE ratio high of 25x, the terminal value would be $49.113 billion, and the NPV of TV would be $17.042 billion. If we add it to the NPV of dividend, it gives us the total valuation of $18.545 billion. Finally, the fair price would stand at $123 per share.

My Opinion

In my view, Entegris is an outstanding leader in the market, demonstrating robustness with its broad product portfolio and focus on technology. Its future strategy focused on R&D expenses, collaborations, and technical support could accelerate product creation and FCF growth. I also believe that the company is making a lot of efforts to reorganize the business model, with sale of divisions and severance costs. As a result, I think that FCF margin expansion could take place from 2024. Besides, if we take into consideration the total amount of recurrent revenue, I think that most analysts out there will most likely be expecting stable net sales in the coming years. There are obvious risks inherent to the cyclical semiconductor industry and dependence on large customers. In addition, global competition is intense, and the debt is not small. With all that being said, I believe that there is upside potential in the stock valuation.