Andover, Mass.-based MKS Instruments, Inc. (MKSI) provides instruments, systems, subsystems, and process control solutions that measure, monitor, deliver, analyze, power, and control critical parameters of manufacturing processes worldwide. The company operates through three segments: Vacuum & Analysis (V&A); Light & Motion (L&M); and Equipment & Solutions (E&S). 

MKSI shares have slumped 8.7% in price over the past year. However, the stock has gained 5.3% over the past five days to close yesterday’s trading session at $150.60. Also, Wall Street analysts see a 33.4% upside potential in the stock.

The company delivered record revenue and profitability in 2021, despite facing supply chain constraints and other COVID-19-related disruptions. MKSI benefited from strong demand across its vacuum and photonics portfolios. “Revenue from our Advanced Markets exceeded our expectations, led by growth in advanced electronics and industrial applications,” said John T.C. Lee, President, and Chief Executive Officer. Furthermore, the company expects the addition of Atotech Limited (ATC) to help advance its strategy of delivering foundational technology solutions in the era of accelerating miniaturization and complexity, while also accelerating its cash generation capability. Last year MKS agreed to acquire ATC, a leading process chemicals technology and advanced electroplating solutions company. The acquisition is expected to close in the first quarter of this year.

Here’s what could shape MKSI’s performance in the near term:

Stable Past and Expected Performance

The company’s revenues have increased at a 12.4% CAGR over the past three years and 17.9% over the past five years. Also, its EBITDA and levered FCF have grown at CAGRs of 13.2% and 18.9%, respectively, over the past three years. MKSI’s net income increased at a 12% CAGR, while its EPS increased at an 11.5% CAGR over the same period.

The Street expects 9% year-over-year growth in MKSI’s revenues in the current quarter, ending March 31, 2022, 5.6% in the following quarter, and 7.1% in the current year. Also, its EPS is expected to increase 2.7% in the current quarter and 1.1% in the current year. Furthermore, MKSI’s EPS is expected to grow 12% per annum over the next five years.

Impressive Growth

For its fiscal fourth quarter, ended Dec. 31, 2021, its total net revenues increased 15.7% year-over-year to $763.90 million. The increase in net revenues was driven by strong demand from customers in both the semiconductor and advanced markets. Its income from operations stood at $181.80 million, up 23.9% from the prior-year quarter. Also, its non-GAAP net earnings grew 29.5% from its year-ago value to $168.10 million, while its non-GAAP EPS increased 29.1% year-over-year to $3.02. In addition, the company generated record annual operating cash flow of $639.50 million, up 24.6% year-over-year, and record annual free cash flow of $552.80 million, up 29.1% year-over-year.

Stable Profit Margins

MKSI’s EBITDA margin and net income margin of 28.61% and 18.69%, respectively, are 102.7% and 205.9% higher than the 14.12% and 6.11% industry averages. Also, its  15.49% levered FCF margin is 51.8% higher than the 10.21% industry average.

MKSI’s 21.02%, 12.14%, and 12.63% respective ROE, ROA, and ROTC are 178%, 215.4%, and 152.9% higher than the industry averages.

Discounted Valuation

In terms of forward P/E, MKSI is currently trading at 13.70x, which is 46.4% lower than the 25.55x industry average. Also, its 2.65 forward EV/Sales ratio is 23.9% lower than the 3.48 industry average. MKSI’s forward Price/Book and Price/Cash Flow of 2.43x and 7.88x, respectively, compare with the 4.99x and 19.44x industry averages.

Favorable POWR Ratings

MKSI has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B grade for Value, which is consistent with its lower than industry valuation.

MKSI has a C grade for Stability, consistent with its 24-month beta of 1.36.

Of the 92 stocks in the Industrial – Equipment industry, MKSI is ranked #25.

Beyond what I have stated above, one can also view MKSI’s grades for Quality, Sentiment, Momentum, and Growth here.

View the top-rated stocks in the Industrial – Equipment industry here.

Bottom Line

MKSI has delivered a solid performance in its last reported quarter, driven by strong demand for its products. Also, given its stable financial footing, it should stand to benefit from the growing semiconductor and industrial technologies market. Thus, we think it could be worth betting on the stock.

Note that MKSI is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.

How Does MKS Instruments, Inc. (MKSI) Stack Up Against its Peers?

MKSI has an overall POWR Rating of B. However, one could also check out these other stocks within the Industrial – Equipment industry with A (Strong Buy) rating: Standex International Corporation (SXI), Applied Industrial Technologies, Inc. (AIT), and Allied Motion Technologies, Inc. (AMOT).

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