Entegris, Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

A leading global supplier of advanced materials and process solutions for the semiconductor and other high-tech industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Entegris, Inc. is a materials and solutions supplier for the high-tech industry, with a strong emphasis on semiconductor manufacturing. The company provides a diverse range of products, from filters to advanced ceramics, which are essential for the manufacturing process. Entegris positions itself as a key enabler of technology by providing the foundational materials and solutions that enhance their customer’s manufacturing processes and product performance. This places the company at a critical point of semiconductor manufacturing, directly impacting yields and performance.

Business Overview:

  • Revenues: Entegris’ revenue is divided into three main segments:
    1. Specialty Chemicals and Engineered Materials (SCEM): This segment is focused on providing advanced and high-purity materials that enable its clients to achieve high reliability and performance, all while reducing cost and maximizing yields during the manufacturing process. This part of the business offers a suite of materials used in areas such as chemical production, precision polishing, and chemical mechanical planarization (CMP). The main use is in creating semi-conductor wafers. 2. Advanced Materials Handling (AMH): This segment provides high-performance manufacturing and process solutions, such as wafer transport containers, for advanced semiconductors that reduce defects and contamination in manufacturing processes. This unit also offers handling equipment for other industries where product purity is paramount. 3. Microcontamination Control (MC): This segment includes filtration, purification, and separation technologies that reduce and control contaminants that could lead to manufacturing defects, particularly for customers in the semi-conductor industry. Entegris is the market leader in this segment.
  • Trends in the Industry: The semiconductor industry is characterized by a relentless push toward miniaturization, demanding ever-purer materials and more precise manufacturing methods. The industry is driven by technological advancements, increasing global consumption of electronics, and the push by governments to grow domestic semi-conductor production. The need to produce highly advanced chips, means that customers put their focus on quality and cost, and the need to eliminate defects, all of which drives demand for ENTG’s products. The industry is also cyclical, with boom and bust cycles.
  • Margins: Entegris boasts high margins, reflecting its specialized product offerings.
    • Their adjusted gross margins for 2023 were around 44%, which while very good, was down from levels of above 48% in 2021.
    • Adjusted Operating margins fell to levels of 26-27% in 2023, from 32%+ in 2021.
    • They saw a net margin, as a percentage of sales, of 13% in 2023, compared to over 20% in 2021. These margins are still very good, but below historical levels.
  • Competitive Landscape: Entegris operates in a niche market with specialized requirements. The company’s primary competitors include other materials suppliers specializing in high purity materials, filtration systems, and other key components needed for semiconductor fabrication. While competition exists, Entegris leverages its technological expertise and strong customer relationships to gain market leadership, particularly in Microcontamination Control.
  • What Makes Entegris Different: Entegris differentiates itself through its focus on creating specialized solutions. The company also works closely with its clients to come up with solutions specifically for them. It is considered as the leader in microcontamination control in the semiconductor industry, and that its products are of such quality and importance that it is unlikely to lose customers easily. Further, they have strong IP and are constantly innovating in new products to support the needs of its clients. Also, it is also important to note, that its management and staff are highly experienced and specialized in the sector, and these high-tech employees are more difficult to recruit.

Financial Analysis:

  • Recent Results: Their most recent quarter, the 2023Q4, showed a recovery in sales and net margins and showed better performance than analysts predicted. In 2023, they were heavily impacted by the semi-conductor slow down, as their revenues were down by around 10% in 2023 compared to 2022, due to a fall in volumes and more specifically in memory chips which is a large end market for them. But the results from Q4, point to a recovery in those industries. * This meant, that the company had sales of $2.98B, down 10%, gross profit down 17%, operating income was down 22% and net income down 42%.
  • Long-Term Trend: Over the last ten years, the company has seen an average organic revenue growth of 12%. However, looking at the period between 2017-2022 (pre slowdown) growth was closer to 18-20%. Further, the company has had historically impressive operating and net margins in the range of 20% and higher, and a ROIC in high double digits to mid-teens. In 2023, margins and ROIC collapsed, but are trending upwards in recent quarters.
  • Balance Sheet: Entegris shows a relatively healthy balance sheet. The company has a debt of $4.8B, as against cash of $875M. The bulk of the debt is from an acquisition of a competitor, CMC materials. The company has a debt-to-EBITDA of around 4. The company has total assets of around $6.5B. Entegris also has goodwill from acquisitions of around 2.8B, but this is still smaller than its current equity. Overall a decent balance sheet, given they have to incur significant capex to innovate.
  • Capital Allocation: The company has a dividend, but it does not amount to very much of the overall earnings and they use stock buybacks and reinvestment into the business for capital allocation. They have paused all buybacks while they pay down debt after the CMC Materials acquisition.
  • Recent Concerns & Management Discussion:
    1. Semiconductor Slowdown: Entegris, like other companies in its sector, had a difficult 2023 because of the semi-conductor downturn, but is showing recovery as memory shipments and demand start to improve. They expect an acceleration of volume growth to come throughout 2024.
    2. Debt from Acquisition: Entegris is also focused on reducing their leverage in coming quarters and is aiming to bring debt-to-EBITDA back in line with their targets. The integration of CMC Materials is progressing well.
    3. Inflation: They have also noted higher pricing pressures and increases in costs. That is why the company has embarked on a significant cost cutting program to restore the profitability of the business. Overall, the company seems to be focused on managing the current short term risks, while focusing on long-term growth opportunities. The management believes its economic moat and leading position in the industry are strong.

Moat Analysis Rating: 3 / 5

  • Intangible Assets: Entegris benefits from a solid brand name (particularly in the semiconductor industry for its focus on purity, reliability, and quality) and long-standing customer relationships in its highly specialized niches.
  • Switching Costs: Given that their product is intimately intertwined with their customer’s manufacturing process (particularly with regards to microcontamination controls and advanced materials) and that failure can create huge losses for them, Entegris’ customers have very high switching costs.
  • Network Effects: Their vast knowledge of the industry provides them with an edge over potential competition. But these benefits are mainly limited to existing customers and are difficult to transfer to new customers.
  • Cost Advantages: Entegris benefits from scale advantages, as it is already a large company, and from proprietary process know-how. However, these advantages are difficult to quantify and could be overtaken in the long term.
  • Durability: It is highly unlikely that a competitor could create the same level of products as Entegris, or compete on a global level like Entegris can. The company has worked hard to protect its business and has high levels of client retention, despite the fact that its core business is cyclical.
  • Conclusion: Based on a combination of its strong intangible assets, sticky customers, and industry wide advantage, I am rating it a 3/5 in the moat. It is hard to give it a higher moat, given the cyclical nature of the industry and the potential of technological disruption.

Risks to the Moat and Business Resilience:

  • Technology Risk: Entegris is dependent on technological advancements in the semiconductor and other high-tech industries, which could lead to disruption of their core business if the technology shifts significantly. Also, the increasing use of AI and cloud technologies in all sectors means that ENTG needs to be on the forefront of innovating to cater to these trends.
  • Cyclicality: The semiconductor industry is highly cyclical, meaning Entegris’ revenue and earnings are subject to the industry’s ups and downs, which will reduce revenues at downturns. They are dependent on customers needing to expand and make new chips, and this may take a while for them to recoup profits.
  • Concentration Risk: Much of Entegris’ revenues come from a limited number of customers, meaning a loss of a key client would severely impact their revenues. Also, most of their revenues are derived from a few key geographies. As such, macro shocks and geopolitical instability in these countries could have a large impact on their revenues.
  • Acquisition Risk: Over the last few years, ENTG has engaged in multiple acquisitions, meaning there is always a risk that integrating them could prove more troublesome and time consuming than expected.

Understandability: Rating: 4 / 5

While Entegris offers a variety of products, its core business revolves around supplying materials for the high-tech industries, primarily the semiconductor industry. As such, understanding what the business does and how it derives value is relatively straightforward. However, because some of the underlying tech used for its products are highly technical, an investor might have a hard time understanding some aspects of the business. The moat and the key value drivers are easily identifiable, and hence I rate it at 4/5 for understandability.

Balance Sheet Health: Rating: 4 / 5 Entegris has a reasonably good balance sheet but is carrying a fair bit of debt related to its acquisitions. They also have intangible assets of about 40% of its total assets, which is not ideal. They are focusing on deleveraging and should come out of it stronger. As such, I am giving it a rating of 4/5 for its balance sheet health.