Entegris (NASDAQ:ENTG) Posts Better-Than-Expected Sales In Q4 But Quarterly Guidance Underwhelms

Full Report / February 13, 2024

Semiconductor materials supplier Entegris (NASDAQ:ENTG) reported Q4 FY2023 results topping analysts' expectations, with revenue down 14.1% year on year to $812.3 million. On the other hand, next quarter's revenue guidance of $780 million was less impressive, coming in 2.7% below analysts' estimates. It made a non-GAAP profit of $0.65 per share, down from its profit of $0.83 per share in the same quarter last year.

Entegris (ENTG) Q4 FY2023 Highlights:

  • Revenue: $812.3 million vs analyst estimates of $780.9 million (4% beat)
  • EPS (non-GAAP): $0.65 vs analyst estimates of $0.58 (11.8% beat)
  • Revenue Guidance for Q1 2024 is $780 million at the midpoint, below analyst estimates of $802 million
  • EPS (non-GAAP) Guidance for Q1 2024 is $0.63 million at the midpoint, below analyst estimates of $0.64
  • Free Cash Flow of $21.99 million, down 82% from the previous quarter
  • Inventory Days Outstanding: 118, up from 116 in the previous quarter
  • Gross Margin (GAAP): 42.4%, in line with the same quarter last year
  • Market Capitalization: $18.94 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 25.9% annually. But as you can see below, its revenue declined from $946.1 million in the same quarter last year to $812.3 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 Total Revenue

Even though Entegris surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 14.1% year on year. This could mean that the current downcycle is deepening.

Entegris's revenue growth has decelerated over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 15.4% year-on-year revenue decline while analysts are expecting a 0.8% drop 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.

Entegris Inventory Days Outstanding

This quarter, Entegris's DIO came in at 118, which is 5 days below its five-year average. These numbers show that despite the recent increase, there's no indication of an excessive inventory buildup.

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 42.4% in Q4, down 0.3 percentage points year on year.

Entegris Gross Margin (GAAP)

Entegris's gross margins have been stable over the last 12 months, averaging 42.7%. Although its margins remain below the peer group average, the trend points to a likely stable pricing environment.


Entegris reported an operating margin of 20.7% in Q4, down 2.5 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 Adjusted Operating Margin

Entegris's operating margins have been trending down over the last year, averaging 21.8%. 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 25.4% 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 $21.99 million in Q4, up 119% year on year.

Entegris Free Cash Flow

As you can see above, Entegris produced free cash flow of just $172.7 million in the last year, resulting in a measly 4.9% free cash flow margin. Entegris will need to improve its free cash flow conversion if it wants to stay competitive.

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 12.8%, 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 over the last two years averaged a 8.5 percentage point decrease each year. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.

Key Takeaways from Entegris's Q4 Results

We liked that revenue and EPS both beat analysts' expectations this quarter. On the other hand, both its revenue and EPS guidance for next quarter missed analysts' expectations and its operating margin decreased. Zooming out, we think this was a mixed quarter. Given some of the poor earnings results from other semis companies this season, these results may be good enough and better-than-feared. The stock is up 2.3% after reporting and currently trades at $127 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.

We cheer for everyone who's making the lives of others easier through technology, but in the case of Entegris, we'll be cheering from the sidelines. 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 37.4x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

Wall Street analysts covering the company had a one-year price target of $118.03 per share right before these results (compared to the current share price of $127).

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