Materion Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Materion Corporation is a leading global supplier of advanced materials, including performance alloys, composites, and engineered materials, used in diverse 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.

Materion, headquartered in Mayfield Heights, Ohio, is a specialized materials company that stands apart through its focus on high-performance materials and alloys. Unlike commodity material suppliers, Materion focuses on providing differentiated solutions that cater to specific performance requirements of industries, such as aerospace, defense, electronics, industrial, energy, consumer goods and medical.

Business Explanation:

Revenue Distribution: Materion operates primarily through three segments: Performance Materials, Advanced Materials, and Precision Optics.

Performance Materials: This segment provides high-performance alloy and composite solutions. These materials are often designed for specialized use cases that require specific properties such as high-strength, high-conductivity, or high-temperature resistance. Applications range from aerospace and defense to electrical and industrial applications.
Advanced Materials: This segment focuses on the manufacture of advanced specialty products like sputter targets, beryllium-based materials, and metal matrix composites. These materials are used in a wide variety of tech-heavy industries, including the semiconductor, telecommunications, and energy sectors, where their unique properties are essential.
Precision Optics: This segment provides precision optical components and coatings that are primarily used in the defense and medical device industries.

Industry Trends:

Aerospace & Defense: Driven by the increase in military spending and new airframe production, this sector represents a significant share of Materion’s revenue.
Semiconductor & Electronics: The growth in demand for high-end electronics components and chips, fueled by AI, IoT, and other digital applications, provides a strong growth opportunity.
Medical Devices: The medical industry is known for strong regulatory protection, high margins and innovation. The need for innovative medical tools and solutions leads to high demand for specialized materials that Materion provides.
Energy: The trend toward energy efficiency and the demand for renewables provides new opportunities for materials with specific properties.
- e.g., solar cells, power transmission and storage materials, and for use in electric vehicles.
Industrial markets: With industrial markets focusing on automation, efficiency and automation, there is a strong demand for solutions that include more precision and durability.

Competitive Landscape: The competitive landscape is characterized by a mix of specialized and niche players, as well as large industrial conglomerates:

Specialized Materials Suppliers: These competitors can be more agile, responsive to customer needs, and focused on small niche markets.
Large Industrial Conglomerates: These competitors can have large scales and more established distribution chains. However, they often don’t focus on specific niche industries as Materion does.
Emerging Competitors: Startups that create new materials may offer innovative but unproven alternatives to Materion’s offerings.

What Makes Materion Different:

Unlike standard material suppliers, Materion focuses on high-performance materials and custom solutions. The company maintains strong relationships with its customer base to develop custom products, often including proprietary technologies. The “moat”, if any, is based on specific know-how and innovation within its niche areas, not on price. This differentiation in specialty materials and the high level of customization can be difficult for competitors to replicate, ensuring that its business benefits from these strong and long lasting partnerships with its customers.

Margins:

The gross margin for Materion is around 25%, but the gross profit margins vary considerably across different segments.
Profitability can be highly susceptible to changes in prices of raw materials and metals.

Financial Analysis:

Income Statement:

Revenue: Net sales were $1.244 billion in fiscal year 2022, which represents a 12% increase over the previous year’s $1.112 billion. The increase in value-added sales has been noted.
Operating Expenses: SG&A has shown significant increases.
Net Income: Net income for the full year of 2022 was $66 million, which is significantly less than 2021’s $107 million. This is explained by several factors in this particular year including higher expenses related to the acquisition of the ILC business, a fire event, and increased expenses in R&D, sales, general and administration expenses. It will also be important to track profitability and the return to a growth trajectory. This will heavily rely on if and how the underlying factors driving net income become a thing of the past.
Gross Profit: Gross profit margin was reported at around 25% in the latest quarter, but this number is significantly influenced by material prices, with different segments seeing different margins.
Earnings per Share: Basic EPS was 2.30, diluted was 2.20 in 2022 which is significantly lower than 3.80 and 3.65 in 2021.

Balance Sheet:

Assets: Total assets were at 1.762 billion in the most recent statement. Inventory and property, plant, and equipment are significant proportions of total assets. There have been material increases in the total assets, reflecting recent acquisitions.

The long-term trend of goodwill and intangibles has been upward, as the company has focused on growing and expanding its business in recent years through acquisitions. This trend may continue in the future.

Liabilities: The debt has been growing, as noted by a debt-to-equity ratio of 0.74. However, it is still not too high, as the company is not overly dependent on debt. It should be noted that long term debt was $437.7M and short term debt was $22.1M in December 2022.

Although the company has increased its debt recently, it is still operating without over leveraging itself, and has a strong liquidity position.

Equity: Total shareholders equity is at 720 million.

A significant increase in goodwill has been noted and it is essential to consider and analyze this aspect while assessing the financial standing of the business.

Cash Flow Statement:

Cash from Operating Activities: Increased from $111M in 2021 to $187M in 2022. This represents a significant rebound of cash generated from operations.
Cash from Investing Activities: This showed as a net cash used of $118 million. This reflects the companies investments into expansion and acquisitions.
Cash from Financing Activities: Has a net negative value of $92 million, due to debt payment and share repurchases

Recent Earnings Calls & Reports:

Management noted the company delivered a record year with its largest full year sales of $1.7 billion. They have increased pricing where necessary to offset inflation, which is good for their profitability. They also mentioned the new strategic approach towards high margin businesses which should be a long-term tailwind for their business and its profitability.

Moat Assessment:

While Materion is a specialized company, it does not yet possess an incredibly strong moat that can be compared to other businesses. It has some features that make it more sustainable than a standard commodity manufacturer, but there are many other companies that are trying to compete in the industry in various different ways and some have a more differentiated offering. Given this, we rate the moat as 2.

Intangible Assets (brands, patents, regulations): Materion possesses patents over certain alloys and a growing portfolio of intellectual property, but they are limited in longevity, subject to competition, and may not provide a sustainable moat.
Switching costs: These are mainly present in the areas where they have a high level of customization. Some customers are locked-in, due to the long process involved with making new custom products. This effect is not seen in many of their product lines.
Network Effects: Do not seem to play any role.
Cost Advantage: While the company strives to be a low cost producer, its margins have been quite volatile, thus we cannot conclude that they possess a durable cost advantage over competitors.
Size: The company’s size is not a relevant factor in determining the moat.

Risks That Could Harm the Moat & Resilience:

Disruptive Technologies: The emergence of new materials or manufacturing processes could render Materion’s existing products or technologies less relevant. Also, their patents have a limited life.
Intense Competition: While there aren’t any clear large competitors dominating the market, the competitive landscape includes specialized and smaller companies that can prove a threat to the profitability of Materion.
Pricing Pressures: Fluctuations in metal prices and the cost of inputs can affect Materion’s margins and reduce profitability. In addition, intense competition can squeeze prices.
Supply Chain Issues: A significant part of the supply chain of Materion includes hard-to-get raw materials. Any kind of supply chain issue, specially given the geographical position of certain mines, could greatly affect the manufacturing capacity.
Economic Downturn: In an economic recession, industries such as aerospace, automobiles and electronics could suffer significantly, which in turn will hurt the revenues of MTRN.
Reliance on few key customers: While MTRN does not have a reliance on a few number of customers, some of its revenue comes from long-term partnerships with a small number of big names. Loss of these relationships could greatly impact the company.

The recent conflict between Russia and Ukraine and the high level of trade tensions between USA and China pose great risks to supply chains and their profitability, and these events must be considered carefully when analyzing the business.

MTRN has mentioned in their earnings report the ongoing effects of inflation. It is important to determine how much they will be able to offset higher costs with pricing increases.

Business Resilience:

High Level of Customization: By having custom products for various different industries, they do not rely too heavily on specific trends. This diversification could greatly benefit the company.
Long-Term Relationships with Clients: MTRN seems to cultivate great relationships with its clients that often last for years. This should allow them to better navigate economic downturns and more efficiently capitalize on any economic upturn.
Specialization: They are specialized in certain materials that would be extremely hard to replicate. This provides them more breathing room against more commodity style companies.

Understandability Assessment:

The business model is relatively complex, spanning multiple industries with unique requirements. You should understand the unique role it plays in its various different industries. You also need to consider the nuances of metal production, and the complexity of pricing a metal. Given these complexities, we give it a understandability rating of 3.

Balance Sheet Health Assessment:

While the company still seems financially sound, its debt levels have been rising, and there have been notable write-offs. Given these and other factors, such as the potential volatility of the business, we give it a balance sheet health rating of 3.

This report does not include all public information on the company, nor does it reflect any personal opinions or preferences.