Founded in 1961, semiconductor chips manufacturer MKS Instruments, Inc. (MKSI) has been a steady performer amid the growing demand for chips in recent years. It has gained 35.7% over the past year.

With the company’s recent acquisition proposal for Coherent–one of the world’s leading photonics manufacturers and innovators–and a stronger fourth quarter earnings report driven by an improvement in the semiconductor market, MKSI has gained a great deal of market attention lately. As it continues to make targeted investments to drive long-term organic growth, the company is expected to witness stronger momentum in the near term.

Given MKSI’s  relatively low valuation, we think the stock has plenty of upside. MKS has gained 18.4% over the past three months, and 5.6% year-to-date.

Check out our Semiconductor Industry Report for 2021

Let me prove why MKSI could advance in the near term:

Sustained Demand for Semiconductors

While the COVID-19 pandemic initially disrupted the semiconductor business, the  market bounced back relatively quickly because  a quick embrace globally of the stay-at-home trend drove heightened demand for computers, tablets, TVs and other electronic applications. In fact, a strong demand for 5G wireless, automotive and the associated networking equipment should be the key growth driver for the industry this year and beyond. Because  the world is  about to enter an unprecedented period of industry expansion in the decade ahead, the chip technology market should expand significantly.

MKSI is uniquely positioned to ride the industry’s growth, given its diverse portfolio and rapid advancement in  high-tech manufacturing processes.

Acquisition of Coherent

On February 8, 2021, MKSI confirmed that it has made an offer to acquire Coherent, Inc. in a cash and stock transaction. MKSI  believes its proposed merger  will create a global leader in photonics and accelerate the development of customer solutions, representing  a sustainable and profitable growth opportunity for MKSI.

Strong Financials

MKSI’s revenue has increased 11.9% sequentially to $660.2 million in the fourth quarter ended December 31, 2020. Its gross profit grew 15.1% sequentially to $301.6 million, while its net income rose 170.7% from the year-ago value to $115.6 million. The company’s EPS rose 169.2% year-over-year to $2.10. Its net revenues in the semiconductor market were $393 million, representing a  sequential increase of 9% over this period.

MKSI’s revenues have increased at a CAGR of 6.7% over the past three years, while its levered free cash flow has increased at a CAGR of 4.9% over this period. The company’s tangible book value and total assets increased at CAGRs of 7.4% and 17.3%, respectively, over the same period.

Discounted Valuation

In terms of non-GAAP forward p/e, MKSI is currently trading at 17.9x, 31.8% lower than the industry average 26.25x. MKSI’s forward price/cash flow ratio of 11.86x is 47.6% lower than the industry average 22.62x. Also, the company’s forward ev/sales of 3.42x is 23% lower than the industry average 4.44x.

Impressive Revenue and Earnings Outlook

Analysts expect the company’s revenue to increase 21.8% in the current quarter, 12.5% in the current year and 6.1% next year. Its EPS is expected to grow 42.9% in the current quarter, 16.3% in fiscal 2021 and at a rate of 14% per annum over the next five years.

Consensus Ratings and Price Target Indicate Potential Upside

Currently trading at $170.35, Wall Street analysts expect the stock to hit $201.2 in the near term, which represents  a potential upside of 18.1%.

MKSI has an average broker rating of 1.55, which indicates favorable analyst sentiment. Of 10 Wall Street analysts that rated the stock, one rated it Strong Buy and seven rated it Buy.

Favorable POWR Ratings

MKSI has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. MKSI has a Value Grade of B. This is justified given the stock’s relative undervaluation.

It also has a B grade for Momentum and Growth, consistent with the stock’s gains over the past year and analyst expectations that its revenue and EPS will increase.

Click here to see the additional POWR Ratings for MKSI (Stability, Sentiment, and Quality).

The stock is ranked #18 of 182 stocks in the C-rated Medical – Devices & Equipment industry.

There are several other top-rated stocks in the same industry, click here to access them.

Bottom Line

MKSI has delivered record quarterly results, underpinned by strong demand in the semiconductor market and a continued recovery in advanced markets. Meanwhile, the explosion of 5G technology, big-data, AI, and the growing need for precision manufacturing should drive the demand for its products and solutions significantly in the days to come. Given its strong growth potential and a healthy cash position, we think MKSI will be a worthy addition to one’s  portfolio.

Check out our Semiconductor Industry Report for 2021

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MKSI shares were trading at $168.26 per share on Monday morning, down $2.09 (-1.23%). Year-to-date, MKSI has gained 11.98%, versus a 3.74% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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