Entegris Inc. - The Semiconductor Sweetheart

Entegris Inc (Nasdaq: ENTG) is a Massachusetts-based advanced material science company that specializes in manufacturing the components used in semiconductors. The semiconductor industry has been one of the best performing industries of late: the one-year return on the VanEck Vectors Semiconductor ETF (Nasdaq: SMH) is 88.23% and growing. For that reason, this industry is certainly not one to be overlooked. Semiconductors play a huge role in our technologically advancing world: they are used in every type of electronic device, from smartphones and tablets to cars and clean energy systems, and investors are beginning to realize this. Although Entegris is not a pure semiconductor manufacturer, it is well-positioned to take advantage of this booming secular growth.

macro photography of black circuit board
Image Source: Unsplash

Secular Growth

As mentioned in the introduction, the semiconductor industry is poised to act as the heartbeat of the ongoing technological revolution. Semiconductors are the key component of chips, used in virtually every electronic device, and for that reason, investors have been keen buyers of semiconductor stock of late. One example of this is the returns seen on one of the industry’s largest players: Taiwan Semiconductor Mfg. Co. Ltd. (NYSE: TSM), a company that has seen its stock jump over 120% over the last year. This suggests that investors have already recognized the opportunity of the semiconductor manufacturers themselves, and this is exactly why Entegris is perfectly positioned to build off of what has preceded them.

Supply Chain Diversification

Why is Entegris perfectly positioned…where even are they positioned? Semiconductor manufacturers are starting to become household names with their growing popularity and an increasing number of companies expanding into space. NVIDIA, Texas Instruments, Samsung, Intel, Taiwan Semiconductors, just to name a few, are all making strides in this area and have all seen great financial performance as a result. Entegris sits just behind these big names as the supplier of the materials for their semiconductors. Taiwan Semiconductors and Samsung are their largest clients, accounting for a combined 20% of their revenue. Another client of note is a newcomer to the field Intel Corp (Nasdaq: INTC), which makes up 6.77% of Entegris’s revenue.

What this means is that Entegris represents a diversified portfolio of semiconductor stocks: its revenues are based on contracts with industry stalwarts like the aforementioned Samsung and Taiwan Semiconductors, along with some more risky contracts with unproved semiconductor manufacturers such as Intel. The weighting towards higher reliance on the more established firms is also a positive. These are safer and mean that the underlying asset, Entegris’s stock, is also safer.

Semiconductor Shortages

If you have read the news recently you will probably have seen the global shortage in semiconductors that has been hampering automobile manufacturing in particular. For a firm like Entegris, this is great news because it shows that the industry is expanding and in need of more semiconductors which in turn will mean the semiconductor manufacturers are going to be placing larger orders with the materials manufacturers such as Entegris.

Strong Financial Grounding

From Q1 2017 to the recently announced Q1 2021 results, Entegris’s quarterly revenue has been on a steady upward trajectory, growing from $317.4 million to $512.8 million. The steadiness of this rise demonstrates a strong financial footing for the company, part of the reason why this is attractive compared to competitors at the same level in the supply chain. Furthermore, the revenue growth has also translated to steady net income growth on the other end of the income statement, this trend is also seen in its Free Cash Flow over the same time period. This proves that Entegris has control over its expenses and further strengthens the argument that this company is going to thrive once their order book starts increasing to cope with the global shortages.

Final Words

Entegris is positioned in a booming industry, with a diversified client base, and has comparatively strong control over its financials. The final factor that solidifies Entegris as an overlooked stock over the long-term is the fact that it actually missed its Q1 Revenue Predictions and EPS Predictions on 27th April by just under $6 million (1%) and 3% respectively. However, this is by no means a reason to panic. The fundamentals of the company are still sound, the industry still needs to grow to keep up with demand, and these missed predictions will only have the effect of putting investors off in the short-term, thus discounting the security. This makes now the perfect time to buy as the stock is cheaper than it should be, but its growth estimates and environment remain unchanged and positioned for high returns over the long term.

Disclosure: I own no stake in Entegris, Inc.

Disclaimer: This article is not an investment recommendation,  more

How did you like this article? Let us know so we can better customize your reading experience.

Comments