Vishay Intertechnology

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Vishay Intertechnology is a global manufacturer of discrete semiconductors and passive electronic components vital to various industries, including automotive, industrial, and medical.

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.

Business Overview:

VSH operates in two main segments:

  • MOSFETs (Metal Oxide Semiconductor Field-Effect Transistors): These semiconductors regulate and switch electrical signals, used extensively in power management, automotive systems, and various electronic devices. They include various categories like low-voltage, high-voltage, and high-power MOSFETs.
  • Diodes, Optoelectronics, Resistors, Inductors, and Capacitors: These passive components manage voltage and current flow, provide circuit protection, store energy and charge, and perform other functions. They are crucial for controlling and processing electrical signals. Vishay is the leading global manufacturer of passive components.

Revenue Distribution VSH’s revenues are broadly derived from the industrial, automotive, telecommunications, computing, consumer products, power supplies, and medical markets. While there’s some geographical concentration in Asia, the customer base is diversified across many industries and geographies. Note, that this concentration in Asia does not necessarily imply geographical instability. Specifically, the geographic distribution is as follows:

  • Asia contributed to ~49% of revenue in 2023.
  • Europe contributed to ~31% of revenue in 2023.
  • The Americas contributed to ~19% of revenue in 2023. A notable observation here is that the distribution between all those geographic areas had shifted slightly in recent years, as the Asian market share increased at the expense of the European markets.

Industry Trends The semiconductor industry is highly cyclical and experiences periods of intense growth followed by periods of significant decline. There is also trend to consolidation, with larger companies acquiring smaller players. The shift towards electrification and connectivity is driving strong demand for VSH products. Finally, there is increasing focus on advanced materials, and manufacturing techniques for new applications.

Margins Gross profit margins are driven by: * volume levels, production efficiency, and sourcing costs. * The average selling price of a product. * The composition of a business (e.g. non-commodity products tend to fetch better margins).

  • Pricing of components can vary significantly depending on industry dynamics. Looking through the latest 10Q and the last earning call, the gross margin has recovered and remained stable, at 31.9%. We have also seen some improvements in operating margins that are above 14% in some of the segments. Going forward, I expect a slight compression in margins due to high input costs of silicon, nickel, graphite, lead, and precious metals.

Competitive Landscape VSH competes with other leading suppliers of semiconductors and passive components, including Amphenol, AVX, Kemet, Murata, Samsung Electro-Mechanics, and TDK. Competition in each product segment is driven by technology, price, quality, availability, and delivery time. There are also many smaller players who compete with Vishay on a regional or product-specific basis. VSH strives to differentiate by providing an integrated portfolio of components, which allows customers to reduce the number of suppliers they work with.

What Makes VSH Different?

  • Broad Portfolio: They offer an enormous range of products in multiple product lines. This offers increased supply chain stability to customers, and has created great brand recognition over decades of operation.
  • Global Footprint: VSH has manufacturing facilities across multiple continents. That enables greater responsiveness to local market conditions and offers geographic diversification.
  • Engineering Expertise: VSH has a long track record of innovation, and developing application specific components with high performance and quality, thus differentiating itself from many commodity focused rivals.

Financials in Depth Recent earnings showed a revenue of $853.6 million, a gross profit of $288.1 million, and a net earnings of $65.5 million attributable to Vishay stockholders. Diluted EPS was at $0.47. The company generated $176 million in free cash flow for the trailing nine months of 2023.

  • The overall growth seems to be quite impressive in the semiconductor industry, but is actually skewed by the Optoelectronic Components and Inductors segments, as the MOSFETs and Diodes have struggled recently and are still recovering from poor market conditions.
  • While the revenue is impressive, the company is struggling with profitability, and has seen a drastic decline in income in Q2 of 2024. That has made analysts wonder if it is related to a slowdown in the Chinese market (which contributes for almost 50% of the revenue)
  • The most recent Q3 results are still below expectations, but there seems to be a return to good margins and profitability.

Moat: 3/5

Based on the above analysis, Vishay appears to have a narrow moat with a rating of 3/5. Here’s a breakdown:

  • Scale Advantages (Positive): VSH operates as a large player in a fragmented industry, enjoys economies of scale across its manufacturing facilities and has large scale production capabilities.
  • Intangible Assets (Moderate): The brand has recognition across multiple industries. Also, the company’s patent and IP holdings, while not as large as the biggest companies, may give them an edge in specific market niches.
  • Switching Costs (Weak): Although there are some switching costs, they aren’t extremely high as long-term contracts or other lock-in techniques are not very common in this industry.
  • Network Effects (None): VSH’s business does not have network effects, as its value is not enhanced as it increases its customer base.
  • Cost Advantages (Moderate): VSH leverages low-cost production facilities across various geographies to lower its costs, though competitors could use the same process. Also, it enjoys geographic advantages, but they are not particularly hard to imitate.

While VSH exhibits traits of an economic moat through scale, brand recognition, and some switching costs, its profitability can be easily eroded by technological disruption and other macroeconomic events.

Risks and Resilience:

  • Technological Obsolescence: Given the importance of technological innovation in electronics, product obsolescence can occur very fast, disrupting VSH’s competitive position and margins. The company needs to invest heavily in R&D to maintain this moat, while keeping prices low. This strategy may negatively affect their margins for the long term.
  • Economic Cycles: As a semiconductor and component supplier, VSH’s earnings are highly susceptible to broader economic trends, and slowdowns in key industries like automotive, and IT could impact their profitability. The cyclical nature of the industry is one of the main reasons why most of their competitors fail in the long term.
  • Dependence on Specific Markets: The company has a large reliance on specific markets such as China, and any adverse economic or political change in this region could heavily affect VSH’s revenue.
  • Intense Competition: The electronic components industry is highly competitive, which puts pressure on prices and profit margins. Companies often resort to aggressive pricing, which further shrinks VSH’s profits.
  • Supply Chain Disruptions: In today’s world geopolitical conditions, logistics delays, and supply bottlenecks are common. These are often unpredictable events, and may make it hard for VSH to meet customer’s demand.

VSH demonstrates some resilience due to its diversified customer base and product portfolio, which allows it to mitigate the effects of downturns in certain markets. VSH is also constantly looking to cut costs and improve efficiency, as it is essential for the long-term survival of semiconductor companies. They are also strategically expanding into new markets, to further improve their diversification. However, the cyclicality and the intense competition makes VSH very susceptible to market fluctuations, and it cannot simply control those external factors.

Understandability: 3/5

The business is of moderate complexity. While the products (semiconductors and passive components) are fairly easy to understand, the technical details behind their use in various end applications can be more involved. Also, their main growth strategy, namely acquisitions can further complicate things. Furthermore, the accounting information is not as clear as other more pure-play companies. It takes time to differentiate operating profits from non-operating profits. Also, they conduct their business using multiple currencies, which may add to the accounting complexity.

Balance Sheet Health: 4/5

  • VSH’s balance sheet is mostly very healthy.
  • They have $1.09 Billion of cash and short-term investments, compared to $819 million in long-term debt and convertible senior notes.
  • Their current ratio is good at 2.6 and the company isn’t suffering any financial problems.
  • The debt levels are decreasing due to debt repayments.
  • Also the company has been showing a positive cash flow for a long time. The only concerning factor is that the debt seems to be somewhat high relative to the equity, though the management team states that the credit ratings are adequate for their level of debt, it could still be a risk as the debt may become more expensive and riskier to refinance in the future.

Recent Concerns and Management Outlook: The management has a positive outlook, as they think there is a new, long-term secular trend forming in the electronic components market. Companies are starting to buy more and more components in order to make their products more efficient, and they are looking to source as much as possible from reliable sources like Vishay. They also believe that their recent acquisitions and expansions will provide for a good growth trajectory. As a result, they have recently increased their shareholder return policy to return 70% of cash flow to shareholders. Management believes that the company’s long-term investments will drive future revenue and free cash flow, and that they will be able to weather any short-term headwinds. However, there is also concern about a possible downturn in the Chinese market, which is an important geography for the company. Overall the company seems to be well run, with some potential headwinds.