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  1. Home
  2. / Investing
  3. / Industrials

Company Never Heard Of (CNHO) No. 2: Little Orphan Entegris

The stock doesn't get the respect it deserves.
By JAMES GENTILE Jun 10, 2016 | 10:04 AM EDT
Stocks quotes in this article: ENTG, DOW, CCMP, AMAT, NDSN

Some stocks just get orphaned, as quants and fundamentalists alike enjoy nice clean boxes to check and put stocks into. With this, some good-quality companies just get left behind.

Entegris (ENTG) is one of these names. Is it a filtration company? Is it a semiconductor name? Is it a process industrial? ENTG is all three -- and a very good company at that.

Entegris, based in Massachusetts, is a technology leader in the advanced chemicals, filtration and equipment for the semiconductor industry. High-purity, sensitive transport and process efficiency is this company's game -- and its customers need it more every day. As the complexity and density of the chip-making process becomes more intense, the products that Entegris makes become more critical. This creates a moat around the company's products -- and an annuity-like revenue stream in the aftermarket -- that stabilizes the more cyclical aspects of its revenue base.

Entegris also has products tied to semiconductor capital spending, a more cyclical piece of the nearly $1.1 billion in revenue, which can add an element of volatility to the business. But over time, with the company's disciplined target model approach to managing variable costs, earnings growth has become quite reliable and steady. 

Competitors are among the largest and best-quality companies in the world. Pall Corporation, acquired by Danaher at a whopping 20x EBITDA, is among the company's largest competitors. In the advanced chemicals piece of the business, the company competes with Dow Chemical (DOW) and Cabot Microelectronics (CCMP), among others. But Entegris is able to hang, spending 10% of revenue on research and development and holding a solid operating margin level near 20% 

Given recent data points that we have observed from Applied Materials (AMAT) and Nordson (NDSN), we may see a period of recovered capital spending for the company's contamination control products as 2016 progresses. Even so, given the company's aftermarket exposure, we can rely on a less volatile earnings stream, which should yield a higher valuation than what ENTG is currently being awarded.

Entegris, given its orphaned status, does not get the respect it deserves, especially from a valuation perspective. I can imagine one of the company's largest and most acquisitive competitors may fix that with a sweet premium to the current enterprise value.

Investing in companies we've never heard of is fun,

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At the time of publicaiton, Gentile had no positions in any of the securities mentioned.

TAGS: Investing | U.S. Equity | Basic Materials | Industrials | Stocks

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