I've always have a sneaking suspicion that spin-offs are better investments than rumps! So what's happened since Air Products split off $VSM? +72% versus +4% in one year. Wow.
Is the trend done? Or more to come?
Key Stats
| Ticker | VSM |
|---|---|
| Sector | Specialty Chemicals |
| Latest price | $40.20 |
| Value | $4,374M |
| Daily vol | $22M |
| Date | 16 October 2017 |
| Financials | SEC Financials Investor Deck |
| Website | versummaterials.com |
1. What's this got to do with Semis?
Okay, $VSM is a specialty chemical business, but it's top clients are Intel, Samsumg and TSMC. So it's really a play on the semiconductor market!
Versum has two business lines:
- The Materials segment is an integrated provider of specialty materials for the electronics industry, focusing on the integrated circuit and flat-panel display markets.
- The DS&S segment designs, manufactures, installs, operates, and maintains chemical and gas delivery and distribution systems for specialty gases and chemicals delivered directly to its customers' manufacturing tools.
Now this sort of business has gotta make engineers excited! It's all about "molecular design and synthesis, purification, advanced analytics, formulation development and containers and delivery systems for the handling of high purity materials.
They note in their annual report, they've 200 scientists helping them invite new products for the semi-industry. In fact, some of VSM's inventions are key to helping with miniaturization. i.e. allowing smaller / lighter devices.
Though given the Materials division is 78% of sales and 85% of profits, it seems like there's really only one key driver of VSM. And separately, the top 3 clients are nearly 50% of sales. So there's a really concentration risk.
Margins getting good!
So the business didn't grow in the year before it was spun out. But the margin's been getting better and better, with the earnings nearly doubling in 2 years.
| Sept year end | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Revenue | $951m | $853m | $943m | $1,009m | $970m | $1,114m | $1,188m |
| EPS | $-0.18 | $-0.74 | $1.14 | $1.69 | $1.95 | $1.91 | $2.12 |
And looking to the balance sheet, VSM does have debt, $700m or so, equal to a "reasonable" 2x profits. Good to see that Air Products didn't saddle it with a burden when it set Versum free. Phew. And none of us will be surprise to see a dividend. Though it's rather small at just 5% of earnings being paid out each year.
2. Bigger / Better Elsewhere?
In their 10-K they highlight a long list of competitors, though many are inside mega conglomerate chemical businesses.
Adeka, Air Liquide, Cabot Microelectronics, Dow Chemical, Entegris, FujiFilm, Hyosung, JSR Microelectronics, Merck EM, and SK Materials.
So it's not really that fair to sign VSM's praises, though it's margins and returns are delightful.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Versum Materials Inc | $1.1bn | 33% | 56% |
| Cabot Microelectronics Corporation | $0.5bn | 27% | 16% |
| Entegris Inc | $1.3bn | 23% | 13% |
| FUJIFILM Holdings Corp. (ADR) | $21bn | 13% | 8% |
| Air Liquide SA | €18bn | 25% | 13% |
| DowDuPont Inc | $75bn | 20% | N/A |
Perhaps their specialization pays off. They note
The semiconductor market is global in scope with nearly all major semiconductor manufacturers having operations in multiple countries. We serve our customers across three continents and participate in the specialty gases and materials space spanning six of the seven critical processes steps required for semiconductor manufacturing. Because of our breadth, we believe that there are no global competitors that compete with us across the full range of our product offerings.
So maybe they do have a meaningful competitive advantage. If so, it's not showing in a valuation premium. The stock doesn't look expensive relative to either the US listed small caps, or the big mega-cap conglomerates.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| VSM | $4,374M | 21x | N/A | 0% | 6% |
| CCMP.O | $2,103M | 25x | 14% | 1% | 6% |
| ENTG.O | $4,204M | 23x | 15% | 0% | 5% |
| FUJIY.PK | $20,458M | 15x | 8% | 2% | 15% |
| AIRP.PA | $44,689M | 22x | 5% | 2% | 11% |
| DWDP.K | $167,423M | 22x | 8% | 2% | N/A |
Suppose we shouldn't have been surprised that the PE ratio would rise from 14x at the time of the de-merger to today's 21x. Now that's a nice re-rating!
3. Wall Street's positive thinking
Ever since the de-merger, the professionals on Wall Street have said Buy! They've ramped their target price every quarter too. Though with a current target of $40, they really aren't suggesting any short-term upside.
Now, the management team has beaten estimates every quarter since IPO, there doesn't look like there is a competitive or industry headwind, so it sure feels like they are being cautious. Reasonably so?
4. Looking to 2018?
So the August earnings call led to an upgrade. And a jump in the stock price. So, isn't it time to look to 2018?
The markets' expecting 11% EPS growth. The end market is growing nicely, they are making productivity improvements, and as an independent company they are doing small bolt on purchases. All in all, it's a nice story.
I can't see a reason to go wild about Versum, but in the same way, there's no reason to avoid it. I like it, even if it's more likely to be a long-term winner. Quality stuff :)
View the archive of Stock a Day posts at it's subreddit stockaday. Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Submitted October 16, 2017 at 12:07PM by shane_stockflare http://ift.tt/2ym0Sbt
