There is buzz surrounding all sorts of semiconductor businesses. The world woke up to the need for more chip manufacturing during the pandemic's height, and governments are now pouring tens of billions of dollars into bolstering their supply chains as a result.
One company that could be a big beneficiary is Entegris (ENTG 3.16%), a top supplier of materials and manufacturing processes for tech -- including the chip industry. Entegris is actually one of the 30 stocks in the iShares Semiconductor ETF.
The stock has been in rally mode this year. It's up nearly 50% as of this writing as Entegris manages the integration of its big $5.7 billion acquisition of peer CMC Materials, completed the summer of 2022. Is Entegris a buy now?
Squeezing synergies from a giant chemicals specialist
Entegris' tie-up with CMC Materials created a giant in specialty chemicals, materials, and handling (like trays and boxes for transporting silicon wafers and chips and related semiconductor equipment) for high tech.
Manufacturing chips and computing systems is a complex process involving hundreds of steps and dozens of chemicals (besides the silicon chips are made of), and with parts needing to be transported in bulk to various locations spanning multiple continents. Entegris is deeply integrated into the global supply chain.
This is just the type of diversified industrial products company that could benefit from things like the U.S. CHIPS Act, European Chips Act, and related semiconductor manufacturing funding taking place elsewhere, like Taiwan, Japan, and China.
Entegris has been a solid long-term stock, increasing more than 900% in the last 10-year stretch, and shelling out a rising dividend since initiating a quarterly payout in 2017.
Data by YCharts.
However, a key to Entegris' long-term success going forward will be realizing synergies from its operation following the takeover of CMC.
In the last year, operating profit margins have contracted from well over 20% to at times just a single-digit percentage, and free cash flow has dipped into the red (negative $68 million in the last reported 12-month stretch). Long-term debt sat at nearly $5.5 billion, and cash and short-term investments at just $566 million, at the end of June 2023.
Such is how it often goes when big mergers and acquisitions take place.
A long-term value in the making?
The work toward paying down debt and streamlining operations is well underway. This year, Entegris offloaded multiple segments it deemed non-strategic to its focus on tech manufacturing, including the recent $700 million sale of its "electronics chemicals" business to Japan's Fujifilm Holdings in early October. That cash will go toward paying down debt, a good thing given that the U.S. Federal Reserve is poised to keep interest rates higher for longer.
As for free cash flow, besides whittling down redundant expenses, Entegris will also be working through elevated capital expenditures as it expands into key areas in support of its chip fab partners.
For example, Entegris recently broke ground on a new manufacturing facility in Colorado Springs, Colorado. The facility is near chip company fabs and design centers operated by Analog Devices, Broadcom, Microchip Technology, and others. As that project winds down in early 2025, free cash flow should jump higher.
At this point in its transformation, it's difficult to stick a fair value on Entegris. The stock's valuation using trailing 12-month earnings and free cash flow isn't meaningful, and insight into the newly merged company's profitability in 2024 and beyond is limited.
Shares currently trade for about 27 times analysts' expectations for 2024 earnings per share, but take that with a grain of salt. Management will need to prove it can pay down debt and boost profit margins again after full integration of CMC Materials, as well as that recent sale to Fujifilm.
For now, I'm content to watch Entegris from the sidelines while its future earnings power becomes more clear. However, the company has a solid track record of market outperformance, and could return to its long-term winning streak.
Entegris is on my watchlist as semiconductor and computing technology manufacturing gets a big boost from federal governments all over the world in the next few years.
