Advanced materials company Entegris Inc. (ENTG, Financial) recently joined the elite ranks of Buffett-Munger companies. The latter name comes from two veteran investors, Warren Buffett (Trades, Portfolio), who said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” and Charlie Munger (Trades, Portfolio) of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial).
Broadly speaking, a Buffett-Munger company is a quality company at a fair or undervalued price. More specifically, Entegris has a high predictability rank, competitive advantages, little debt and a fairly valued share price or is selling for less than its intrinsic value (based on the PEG or PEPG ratio).
The following slide from a December investor presentation outlines the products and services the company supplies to the semiconductor industry:
This is how its latest 10-K described its role in semiconductor manufacturing:
“The manufacture of semiconductors requires hundreds of highly complex and sensitive manufacturing steps, during which a variety of materials are repeatedly applied to a silicon wafer to build integrated circuits on the wafer surface. We serve the semiconductor ecosystem by providing specialty materials and chemicals utilized in many process steps, offering a broad range of products to monitor, protect, transport and deliver these critical process materials during the manufacturing process and providing systems to purify liquid chemistry and gases throughout the manufacturing process.”
Entegris reports that the markets for the products it sells are highly competitive. Publicly-traded competitors include Pall Corp. (part of Danaher Corp. (DHR, Financial)), Mersen, the EMD Performance Materials division of Merck KGaA (MRK, Financial), Praxair Inc. (a subsidiary of Linde PLC (LIN, Financial)) and Parker Hannifin Corp. (PH, Financial).
As for competitive advantages, the company noted in its annual filing:
“We believe that our key competitive strengths include our broad product line, our strong research and development infrastructure and investment, our manufacturing excellence, our advanced quality control systems, the low total cost of ownership of our products, our ability to provide our customers with quick order fulfillment and our applications expertise in semiconductor manufacturing processes. However, our competitive position varies depending on the market segment and specific product areas within these segments.”
It added, “Because of the unique breadth of our capabilities, we believe that there are no global competitors that compete with us across the full range of our product offerings.”
This chart, also from the annual filing, shows how it has outperformed both its benchmark index and the Nasdaq Composite index over the past five years:
These are its annual returns:
- 2022 year to date: -10.16%
- One year: 3.65%
- Three years: 49.15%
- Five years: 39.79%
- 10 years: 29.95%
And these are its total annual returns over the past five years:
- 2022: -10.16%
- 2021: 44.20%
- 2020: 91.85%
- 2019: 79.53%
- 2018: -8.37%
- 2017: 70.11%
As the table indicates, Entegris enjoys a solid financial foundation, although its debt levels might be too high for value investors. One key measure of indebtedness is the interest coverage ratio, which tells us how many times over a company can pay the interest on its debts from its operating income. In this case, the ratio of 13.38 is adequate but not outstanding.
However, the debt is low enough to have made it through the Buffett-Munger screener, and it receives a high Altman Z-Score (which means it is in no danger of going bankrupt).
One of the reasons for that strength is the ratio between its weighted average cost of capital and its return on invested capital. The WACC is 8.17%, while the ROIC is significantly higher at 21.42%.
Another measure of financial stability is its growing free cash flow, an average of 16.68% per year over the past decade:
The dark green bars in the industry column show that Entegris has an industry-leading operating margin and return on equity.
Its revenue, Ebitda and earnings per share growth rates are not as competitive. However, note on the table that both Ebitda and earnings are growing faster than revenue, indicating the company is becoming more effective and efficient.
This chart shows how these three metrics have grown in dollar terms over the past 10 years:
Dividends and buybacks
Entegris has a dividend below its industry peers and its own history. That’s not for lack of increases since it started paying a dividend in 2018:
However, the yield has been depressed by the strength of the share price:
In the past five years, the company began repurchasing shares, making up in part for the increases in the previous five years:
Although Entegris' price-earnings ratio is better now than it has been in the past (the high over the past 10 years was 276.6), it is still relatively higher than its peers and competitors in the semiconductors industry. It is currently higher than 69.75% of companies in the industry.
That’s one of the reasons why it has a PEG ratio of 1.76, higher than 63.36% of its industry peers. Nevertheless, its PEG did meet the criteria of the Buffett-Munger screener.
The ratio has been rising since the share price began accelerating in 2019:
The GF Value chart comes in with a rating of modestly overvalued:
Using the default criteria of the discounted cash flow calculator, Entegris comes in as fairly valued:
The default criteria include a growth-stage growth rate of 20% per year. That’s slightly below the average earnings per share growth rate of 22.50% over the past 10 years and well below the five-year average of 38.60%.
Overall, Entegris seems to be modestly overvalued, given its high PEG ratio and GF Value scores. And I would not be surprised to pay a premium for a stock with rapidly rising earnings and share price.
With a GF Score of 97 out of 100, Entegris is one of the highest-rated stocks among the many thousands of publicly traded companies. This chart shows how it outperforms on the profitability, growth and momentum criteria:
In the final quarter of 2021, the investing legends were net buyers of Entegris stock:
Six of them held stakes in the company at year’s end. The three biggest holdings were those of:
- PRIMECAP Management (Trades, Portfolio) with 3,165,812 shares, representing a 2.34% stake in the company and 0.30% of the fund’s assets. It reduced its position by 7.57% during the quarter.
- Mairs and Power (Trades, Portfolio), which owned 221,580 shares on Dec. 31; this was a new holding for the firm.
- Mario Gabelli (Trades, Portfolio) of GAMCO Investors, who made no changes in the fourth quarter and finished with 26,000 shares.
By the fundamentals, Entegris is a high-quality company worthy of inclusion in Buffett-Munger ranks. As we’ve seen, its profitability is excellent and, despite some debt, is financially strong.
Valuation is more contentious, as the company is modestly overvalued. But, as noted, that is often what we need to accept for a company growing quickly and growing profitably.
In determining for whom Entegris stock is suited, the word “growth” is the key. Growth investors may wish to watch it. On the other hand, value investors will likely look at its valuation and debt, then look elsewhere. Income investors, too, will want to look elsewhere for better prices on dividends.