Semiconductor materials supplier Entegris (NASDAQ:ENTG) reported results in line with analysts' expectations in Q1 CY2024, with revenue down 16.4% year on year to $771 million. On the other hand, next quarter's revenue guidance of $800 million was less impressive, coming in 1.6% below analysts' estimates. It made a non-GAAP profit of $0.68 per share, improving from its profit of $0.65 per share in the same quarter last year.
Entegris (ENTG) Q1 CY2024 Highlights:
- Revenue: $771 million vs analyst estimates of $771.5 million (small miss)
- EPS (non-GAAP): $0.68 vs analyst estimates of $0.62 (10.4% beat)
- Revenue Guidance for Q2 CY2024 is $800 million at the midpoint, below analyst estimates of $813.4 million
- Gross Margin (GAAP): 45.6%, up from 44.4% in the same quarter last year
- Inventory Days Outstanding: 136, up from 118 in the previous quarter
- Free Cash Flow of $80.57 million, up from $21.99 million in the previous quarter
- Market Capitalization: $20.04 billion
With fabs representing the company’s largest customer type, Entegris (NASDAQ:ENTG) supplies products that purify, protect, and generally ensure the integrity of raw materials needed for advanced semiconductor manufacturing.
Entegris was founded in 1966 as Fluoroware, a company serving early microelectronics manufacturers. After merging with EMPAK in 1999 and rebranding itself Entegris, the company went public in 2000.
As chip performance advances, semiconductor manufacturing has involved increasing materials content per wafer and generally more process complexity due to smaller geometries, improved architectures, and new materials. These generally lead to ever-increasing requirements for materials purity, quality, and stability to optimize yields. Entegris provides filters, gas, and liquid delivery systems and specialty chemicals that are needed for advanced semiconductor manufacturing environments.
Entegris is organized into three segments to reflect its product portfolio and role in semiconductor manufacturing. The ‘Specialty Chemical and Engineered Materials’ segment offers products such as hazardous gasses and high-fidelity coatings. The ‘Microcontamination Control’ segment offers filters to ensure materials purity. The ‘Advanced Materials Handling’ segment offers technologies to safely and consistently transport materials and products throughout the manufacturing process.
Other competitors who provide materials and chemicals to semiconductor manufacturers include Pall Corporation (part of Danaher (NYSE:DHR)), Shin-Etsu Polymer (TYO:7970), Gemu Valves, and DuPont (NYSE:DD).Sales Growth
Entegris's revenue growth over the last three years has been strong, averaging 22.5% annually. But as you can see below, its revenue declined from $922.4 million in the same quarter last year to $771 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Entegris had a difficult quarter as revenue dropped 16.4% year on year, missing analysts' estimates by 0.1%. This could mean that the current downcycle is deepening.
Entegris's revenue growth has slowed over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 11.2% year-on-year revenue decline, but Wall Street thinks there will be a recovery next year. Analysts' estimates call for 5.4% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Entegris's DIO came in at 136, which is 11 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Entegris's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 45.6% in Q1, up 1.3 percentage points year on year.
Entegris's gross margins have been trending down over the last 12 months, averaging 42.9%. This weakness isn't great as Entegris's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Profitability
Entegris reported an operating margin of 23.1% in Q1, up 0.9 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Entegris's operating margins have been trending down over the last year, averaging 22%. This is a bad sign for Entegris, whose margins are already below average for semiconductor companies. To its credit, however, the company's margins suggest modest pricing power and cost controls.
Earnings, Cash & Competitive Moat
Analysts covering Entegris expect earnings per share to grow 36.6% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Entegris's free cash flow came in at $80.57 million in Q1, up 351% year on year.
Entegris has generated $235.4 million in free cash flow over the last 12 months, or 7% of revenue. This FCF margin enables it to reinvest in its business without depending on the capital markets.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).
Entegris's five-year average ROIC was 13.3%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Entegris's ROIC averaged 9.4 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.
Key Takeaways from Entegris's Q1 Results
We were impressed by how significantly Entegris blew past analysts' EPS expectations this quarter. We were also glad its gross margin improved. On the other hand, its revenue guidance for next quarter missed analysts' expectations and its inventory levels increased. Overall, this was a mixed quarter for Entegris. The stock is flat after reporting and currently trades at $131.75 per share.
Is Now The Time?
When considering an investment in Entegris, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although Entegris is't a bad business, it probably wouldn't be one of our picks. Although its revenue growth has been strong over the last three years, Wall Street expects growth to deteriorate from here. On top of that, its low free cash flow margins give it little breathing room and its relatively low ROIC suggests it has struggled to grow profits historically.
Entegris's price-to-earnings ratio based on the next 12 months is 36.4x. We can find things to like about Entegris and there's no doubt it's a bit of a market darling, at least for some investors. But it seems that there's a lot of optimism already priced in and we wonder whether there might be better opportunities elsewhere right now.
Wall Street analysts covering the company had a one-year price target of $145.81 per share right before these results (compared to the current share price of $131.75).
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