Company Overview: MKS Instruments, Inc. (NASDAQ: MKSI) is engaged in providing instruments, subsystems, and process control solutions that helps in the measurement, monitoring, delivering, analysing, and controlling essential parameters of advanced manufacturing processes. The company’s solutions are mainly utilized in pressure measurement and control, RF & DC power, vacuum technology, lasers, control technology, flow measurement and control, gas composition analysis, ozone generation and delivery, gas and vapor delivery, optics, and vibration control.

MKSI Details

MKSI Rides on Enhancing Shareholder’s Values & Acquisition synergies: MKS Instruments, Inc. (NASDAQ: MKSI) is a worldwide provider of instruments, systems, subsystems, and process control solutions which enhances process performance and productivity for its key customers. The company remains on track to expand its exposure in new markets and to new customers. The acquisition of Electro Scientific Industries (ESI) in February 2019, adds to a significant milestone in executing the company’s key strategies. This buyout advances MKSI’s Surround the Workpiece® offerings by improving systems-level knowhow. The company expects the acquisition to bolster its expertise in the Lasers, Optics Markets, and Photonics, thereby facilitating development of systems to provide unique and cost-effective solutions. Post the acquisition, MKS Instruments has been reporting under three business segments, namely (1) The Vacuum and Analysis segment (2) The Light and Motion and (3) Equipment & Solutions segment.

The Vacuum and Analysis segment offers a broad range of components, instruments, software, and subsystems and accounted for ~60.8% of 2020 revenues. The Light and Motion segment, which accounted for 30% of 2020 revenues, is engaged in offering several components, instruments, and subsystems. Coming to the last segment, Equipment & Solutions segment contains a portfolio of industrial laser-based component and accounted for the remaining 9.2% of 2020 revenues. Notably, total revenues in FY20 stood at $2.3 billion.  In 2020, MKSI was awarded 170 new patents and increased its new product releases by 48% on pcp along with securing a number of key design wins for both semiconductor and advanced markets.

Going forward, MKSI will continue to build on its achievements of 2020 and will remain focussed on providing balanced and profitable growth and establishing long-term value for its shareholders. We believe that the company’s strong innovation, broad-based portfolio and deep customer relationship have helped it to gain competitive advantage over its peers. Since 2015, the company has transformed itself by new product innovations, exposure to high growth segments, along with executing Surround the Workpiece® strategy.

MKSI Transformation Strategy (Source: Company Reports)

4QFY20 Key Highlights: During the quarter, the company reported adjusted earnings of $2.34 per share, which increased a whopping 95% from the prior corresponding period. Revenues during the quarter came in at $660.2 million and soared 32.1% on a year over year basis, owing to resilient demand for the company’s solutions in the semiconductor market. In 4QFY20, Products’ revenues stood at $573.8 million and accounted for ~86.9% of total revenues. Product revenues increased 34.5% on pcp. Services revenues stood at $86.4 million and went up 18% on a year over year a basis. Services revenues accounted for the remaining 13.1% of total revenues.

Revenues from the semiconductor market accounted for ~59.5% of total revenues and came in at $392.9 million. Revenues from this market surged 44.8% on pcp due to increased demand for the Power Solutions business. Revenues from advanced markets surged 17.1% year over year and came in at $267.3 million. This market accounted for ~40.5% of total revenues and were higher from the year-ago period primarily due to recovery in demand trends for Advanced Electronics applications.

Revenues Highlights (Source: Company Reports)

Revenues by Segment: In 4QFY20, Segment-wise, revenues from Vacuum and Analysis came in at $410.8 million and increased a whopping 46.8% from the prior corresponding period. Light and Motion segment revenues came in at $182.3 million, up 3.3% from the prior corresponding period. Equipment & Solutions segment revenues surged 54.9% on a year over year basis and came in at $67.1 million.

Operating Highlights: During the quarter, the company’s adjusted gross margin came in at 45.7%, which expanded 240 basis points (bps) from the prior corresponding period. Adjusted EBITDA for the quarter stood at $180.7 million, up 67.5% on pcp. Whereas adjusted EBITDA margin came in at 27.4%, up 580 bps from the pcp. Non-GAAP operating expenditure in 4QFY20 stood at $138.2 million, up from $124.2 million reported in 4QFY19. Non-GAAP operating income came in at $163.4 million, an increase of 77.4% from the prior corresponding period.

Margin Highlights (Source: Company Reports)

Balance Sheet & Cash Flow Highlights: At the end of the quarter, the company had cash and short-term investments of $836 million, up from $715.7 million in the previous quarter. At the end of 31 December 2020, MKSI’s secured term-loan principal outstanding came in at $833 million with $100 million of incremental borrowing capacity under an asset-based line of credit, which was subject to certain borrowing ground conditions. Cash flow from operations for the quarter came in at $147.2 million, up from $77.3 million reported in the year-ago period. Free cash flow soared 110% on pcp in 4QFY20 and came in at $122.2 million. During the quarter, MKSI paid dividends of $11 million to its shareholders. Paying regular dividends is part of MKSI’s long-term goal of boosting shareholders’ value.

Cash Flow Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 51.52% of the total shareholdings while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc. and Wellington Management Company, LLP are holding a maximum stake in the company at 9.06% and 8.64%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Key Ratios Metrics: The Company reported FY20 gross margin, EBITDA margin and net margin at 45%, 24.5% and 19.5%, higher than FY19 figures of 43.7%, 19.6% and 11.6%, respectively. FY20 current ratio stood at 4.83x, higher than the industry median 2.95x. In FY20, current ratio stood at 4.83x, higher than the industry median 2.95x. In FY20, debt to equity stood at 0.35x, lower than the FY19 figure of 0.44x.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Risk Analysis: MKSI’s rising expenses may weigh on company’s financial performance, going forward.  Further, the business is facing persistent experienced labor shortage and high wage costs. The ongoing economic uncertainty in the wake of the global coronavirus outbreak adds to woes. Also, the company’s business is highly depended on massive capital spending in the semiconductor and consumer electronics industries. Any fluctuations in these industries are likely to cause a reduction in demand for the company’s overall products.

Outlook For the coming quarter, the company expects revenues to be approximately $650 million (+/- $25 million), depicting a growth of 14.1% from the prior corresponding period. Further, MKSI expects non-GAAP earnings to be in the band of $2.16 per share (+/- 20 cents), depicting a growth of 32.4% from the prior corresponding period. The company expects to witness strong demand in its Semiconductor Market along with ongoing recovery in its Advanced Markets.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock went up by ~25.7%. The stock made a 52-week low and high of $66.87 and $192.30, respectively. On the technical analysis front, the stock has a support level of ~$156.86 and a resistance level of ~$180.06. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer average, considering its higher expenditure, stiff competition, integration risk and foreign currency risk. We have taken peers like Advanced Energy Industries Inc (NASDAQ: AEIS), Coherent Inc (NASDAQ: COHR), to name few.  Considering the company’s track record of enhancing shareholder’s value, decent liquidity position, positive cashflows, decent 4QFY20 performance, acquisition synergies, encouraging outlook and valuation, we give a “Buy” recommendation on the stock at the closing price of $161.36, down by 4% on 03 February 2021.

MKSI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.