Current price: $24.61
Market cap: $1.286B
Book value: $911M
MKS Instruments is a provider of instruments, subsystems, and process control solutions for markets like semiconductor capital equipment manufacturing that is selling at an appealing discount. Financial risk is almost non-existent and earnings- and profitability-wise the valuation is quite cheap.
Safety for an investment in MKSI is a relative term. The company, as its 2008-2009 results demonstrate, is going to ride the cycles of the semiconductor market up and down. The company has other product lines that account for a significant portion of revenues (about a third in 2010) and management intends to focus on developing a broader range of business, but investors hoping that increasing product diversity will ease the the big swings that come with the semiconductor market are being overly optimistic. Safety here means a rock-solid balance sheet that enables the company to ride out any kind of soft market with relative ease. Cash on hand is almost $480M, several times total liabilities, and capital expenditures are minimal and could easily be funded out of either free cash flow or the aforementioned store of cash.
As you can see above, the company is cheap on a relative basis, especially when the cash is taken into consideration. Profitability is also quite strong. ROA, ROE, ROIC, and CROIC (using free cash flow) are cyclical but definitely above-average. Business won’t be booming forever – you can actually see from the days sales and days inventory figures that it’s starting to slow down a bit – but the company produces solid returns on capital with a comforting level of financial security.
I think the biggest risk with MKSI is what Peter Lynch called the Bladder Theory of corporate finance – the more cash builds up on the balance sheet, the more urgently management feels the need to piss it all away. Large acquisitions that load up the balance sheet with goodwill are a potential value-destroyer and if management starts getting an itchy acquisition trigger finger it may be time to move along. In recent years management has made shareholder-friendly uses of cash by paying down debt, buying back stock, and declaring a dividend. This doesn’t guarantee future good behavior – $478M in cash is a lot of temptation – but it does buy them the benefit of the doubt.