MKSI Stock Study (9-20-23)

Posted by Mark on December 14, 2023 at 07:06 | Last modified: September 20, 2023 14:42

I recently did a stock study on MKS Instruments Inc. (MKSI) with a closing price of $88.42. The original study is here.

Value Line writes:

     > MKS Instruments is a leading global developer, manufacturer, and
     > supplier of instruments and components used to measure, control,
     > and analyze gases used in semiconductor manufacturing. Also
     > produces instruments for manufacturers of fiber optics, flat-panel
     > displays, gas lasers, and solar cells. Products include pressure-
     > and flow-measurement and control instruments, gauges, injection
     > systems, vacuum-measurement instruments, and valves.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 20.5% and 24.2%, respectively. Lines are mostly up and parallel but EPS looks more cyclical with declines in ’16, ’19 (along with sales), and ’22. PTPM leads peer and industry averages while trending sideways with a last-5-year mean of 17.1%.

Also over the past decade, ROE is about even with peer and industry averages while increasing from 3.6% (’13) to 8.9% (’22) with a last-5-year mean of 14.6%. Debt-to-Capital is lower than peer and industry averages despite increasing from 0% (’13) to 53.5% (’22) with a last-5-year mean of 31.6%.

Interest Coverage is over 25 (Value Line) and Quick Ratio is 1.7 (M*). Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 2.9% YOY and 6.9% per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY 3.2% and 9.9% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 3.1% and 9.0% for ’23 and ’24, respectively (3).
• Value Line projects 9.2% annualized growth from ’22-’27.
• CFRA projects 4.0% YOY and 7.7% per year for ’23 and ’22-’24, respectively.

I am forecasting below the range at 3.0%.

With regard to EPS growth:

• CNN Business projects contraction of 66.6% YOY and 24.4% per year for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year flat annualized growth.
• MarketWatch projects annualized contraction of 21.0% and 6.0% for ’22-’24 and ’22-’25, respectively (8 analysts).
• Nasdaq.com projects growth of 47.3% YOY and 44.2% per year for ’24 and ’23-’25 (4/4/3 analysts for ’23/’24/’25).
• Seeking Alpha projects 4-year annualized growth of 2.2%.
• YF projects YOY 61.4% contraction and 50.6% growth for ’23 and ’24, respectively (7), along with 5-year annualized contraction of 8.0%.
• Zacks projects YOY 62.7% contraction and 47.3% growth for ’23 and ’24, respectively (4).
• Value Line projects 0.2% annualized growth from ’22-’27.
• CFRA projects contraction of 59.8% YOY and 21.8% per year for ’23 and ’22-’24, respectively.

The 4-long-term estimate mean is 1.4% contraction per year [the estimate of highest magnitude is by far YF, and being negative that sinks the whole analysis] and I am forecasting just under at 2.0% contraction per year. I will use ’22 EPS of $5.66/share as the initial value for high EPS and 2023 Q2 EPS of $2.58 (annualized and arbitrary) for low EPS.

My Forecast High P/E is 22.0. Over the past decade, high P/E ranges from 17.4 in ’15 to 46.3 in ’13 with a last-5-year mean of 28.2. The last-5-year-mean average P/E is 19.6 and the last-10-year median is 22.6. I am forecasting below the latter.

My Forecast Low P/E is 10.0. Excluding outliers of 36.8 in ’13 and 24.6 in ’19, low P/E over the past decade ranges from 7.9 in ’18 to 15.8 in ’16 with a last-5-year mean of 11.0. I am forecasting below the latter.

My Low Stock Price Forecast (LSPF) is $64.80. The default based on $2.58/share would be $28.40, which is too extreme. This is a rare instance where I am overriding default and going with a 52-week low that is 26.7% less than the previous close.

Over the past decade, Payout Ratio ranges from 8.7% in ’21 to 95.5% in ’13 with a last-5-year mean of 15.9%. I am forecasting below the entire range at 8.0%.

These inputs land MKSI in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 4.9%.

PAR (using Forecast Average—not High—P/E) is -0.8%, which to me translates to SELL. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead. Even TAR is less than the current risk-free rate (T-bills), though.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 106 studies over the past 90 days (my study and 32 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.3%, 10.0%, 20.3, 11.0, and 15.0%. I am lower on everything but Forecast High P/E. Value Line projects an average annual P/E of 27.5: greater than MS (15.7) and greater than mine (16.0).

MS high/low EPS is $28.86/$7.14 versus my $7.88/$6.48 (per share). I initially went with $2.58/share for low EPS, but selecting a higher LSPF effectively raises this.

I think MS high EPS is unreasonably high. The vast majority of MS studies have high EPS in double digits with half over $20.00/share. Yes, MS projects a much higher EPS growth rate, but where are the initial values coming from? Starting with ’22 EPS, $5.56/share * (1.1 ^ 5) = $8.95/share, which is not [even close to] double digits. With 2023 Q1/Q2 EPS lower, they would have to go back—to the ’21 cyclical high? $9.90/share * (1.1 ^ 5) = $19.91/share, which is close to the $20 mentioned. But why skip ’22 and go back to ’21?

I also find MS low EPS to be unreasonable. The mean is negative (-$1.45) because many studies use ’23 Q2 EPS of -$26.21. I can’t accept a negative number for LSPF or low EPS. This may occur due to a nonrecurring expense or temporary condition of which decreased demand in a cyclical industry could be one. However, analyst estimates projecting contraction are not projecting losses. That’s a big difference. An extended period of negative EPS is not representative of a quality stock amenable to the SSG methodology especially because the math becomes convoluted and invalid.

While the previous discussion is suggestive to me of widespread confusion, the MS LSPF median of $64.80 is identical to mine and the 52-week low price. Of course, this makes complete sense! The MS mean is -$7.50 due to 26 studies with LSPF in the negative triple digits but—I’m going to ignore that and focus on what I consider to be small victories for us all.

My TAR (over 15.0% preferred) is just a fraction of MS 39.2%. Due largely to the triple-digit high EPS numbers, I’ve never seen TAR so high. Comparatively speaking, MOS looks gigantic but I think that’s fooling myself as deep down I consider MS TAR to be NMF. And to be completely honest, I did not feel I was being all that conservative in choosing my inputs (e.g. some are slightly under the average but not below the entire range, my Forecast High P/E is not below the historical average P/E, etc.). I would categorize MOS to be moderate in the current study.

I track a few [wildly conflicting] valuation metrics. PEG is 3.1 and 1.7 per Zacks and my projected P/E, respectively: both overvalued [interestingly, the latter is positive because both projected P/E and growth rate are negative]. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is NMF at -0.2 due to negative EPS in most recent quarter. Kim Butcher’s “quick and dirty DCF” prices the stock at 19.0 * [$14.10 – ($0.92 + $2.80)] = $123.05, which suggests the stock to be 55.2% undervalued. I don’t even know where to go with that. NMF? Cash flow is good?!

For what it’s worth, I have MKSI a BUY under $76/share. To meet my 15.0% TAR criterion, I would need a price closer to $55.

More than anything else, for me to feel good about investing in this stock I need to see a more convincing outlook for EPS growth, which we don’t currently have.