Semiconductor manufacturer Vishay Intertechnology (NYSE:VSH) reported Q1 FY2023 results topping analyst expectations, with revenue up 2.02% year on year to $871 million. Guidance for next quarter's revenue was $880 million at the midpoint, 5.76% above the average of analyst estimates. Vishay Intertechnology made a GAAP profit of $112.2 million, improving on its profit of $104 million, in the same quarter last year.
Vishay Intertechnology (VSH) Q1 FY2023 Highlights:
- Revenue: $871 million vs analyst estimates of $845.8 million (2.98% beat)
- EPS (non-GAAP): $0.79 vs analyst estimates of $0.56 (41.1% beat)
- Revenue guidance for Q2 2023 is $880 million at the midpoint, above analyst estimates of $832.1 million
- Free cash flow of $84.6 million, up from $14.1 million in previous quarter
- Inventory Days Outstanding: 101, up from 93 previous quarter
- Gross Margin (GAAP): 32%, up from 30.3% same quarter last year
Named after the founder's ancestral village in present-day Lithuania, Vishay Intertechnology (NYSE:VSH) manufactures simple chips and electronic components that are building blocks of virtually all types of electronic devices.Vishay mainly manufactures discrete semiconductors and passive electronic components that can be found in almost any electronic device. Discrete semiconductors are chips that have a small number of transistors and are used for basic functions. Discrete semiconductors essentially exist in an on or off state and function alongside more complex chips in virtually every electronic device. The company also manufactures passive electronic devices such as resistors, inductors, and capacitors. These components are essential for the operation of electronic devices and work in tandem with more complex parts from other manufacturers. Through the manufacturing of discrete semiconductors and passive electronic components, Vishay is essentially supplying the most basic elements of any electronic device. Vishay’s peers and competitors include Analog Devices (NASDAQ: ADI) Texas Instruments (NASDAQ: TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), Marvell Technology (NASDAQ:MRVL), and Microchip (NASDAQ:MCHP).
Vishay Intertechnology's revenue growth over the last three years has been unremarkable, averaging 12.5% annually. And as you can see below, last year has been even less strong, with quarterly revenue growing from $853.8 million to $871 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).
While Vishay Intertechnology beat analysts' revenue estimates, this was a very slow quarter with just 2.02% revenue growth. This marks 11 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.
Vishay Intertechnology' appears to be headed for a downturn. While the company is guiding to growth of 1.91% YoY next quarter, analyst consensus sees 4.08% declines over the next twelve months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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, Vishay Intertechnology’s inventory days came in at 101, 16 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Vishay Intertechnology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 32% in Q1, up 1.6 percentage points year on year.
Vishay Intertechnology' gross margins have been trending up over the past year, averaging 30.9%. This is a welcome development, as Vishay Intertechnology's margins are below the group average, potentially pointing to improved demand and pricing.
Vishay Intertechnology reported an operating margin of 23.2% in Q1, up 1.6 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending down over the last year, averaging 17.8%. Not a great indicator for Vishay Intertechnology, whose operating margins are amongst the lowest for semiconductors, caused by only a modest competitive advantage and a relatively inefficient operating model.
Earnings, Cash & Competitive Moat
Wall St analysts are expecting earnings per share to decline 34.4% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Vishay Intertechnology's free cash flow came in at $84.6 million in Q1, down significantly year on year.
Vishay Intertechnology produced free cash flow of just $247.1 million in the last year, which is only 7.03% of revenue. We think shareholders would want to see free cash flow improve as a percentage of revenue.
Vishay Intertechnology has an average return on invested capital (ROIC) of 23.1%, over the last 5 years. That's not bad, and suggests the business can grow profits, but it isn't particularly impressive compared to other semiconductor companies.
Key Takeaways from Vishay Intertechnology's Q1 Results
With a market capitalization of $2.96 billion Vishay Intertechnology is among smaller companies, but its more than $1.03 billion in cash and positive free cash flow over the last twelve months give us confidence that Vishay Intertechnology has the resources it needs to pursue a high growth business strategy.
We were impressed by how strongly Vishay Intertechnology outperformed analysts’ earnings expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the inventory levels increase. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $21.3 per share.
Is Now The Time?
Vishay Intertechnology may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We cheer for everyone who is making the lives of others easier through technology, but in the case of Vishay Intertechnology we will be cheering from the sidelines. Its revenue growth has been mediocre, and analysts expect growth rates to deteriorate from there. And while its solid return on invested capital suggests its business can grow over time, the downside is that its gross margin indicate some combination of pricing pressures or rising production costs and its growth is coming at a cost of significant cash burn.
Vishay Intertechnology's price to earnings ratio based on the next twelve months is 10.1x. 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.
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