HA Flashcards
1
Q
market cap
A
~$3.3B
2
Q
LTM Revenue
A
~$1B
3
Q
Employees
A
3.5K
4
Q
Principal Facilities
A
has at least 61 manufacturing facilities located in 13 countries worldwide
5
Q
Adj. EBITDA Margin
A
23%
6
Q
Founded
A
2002
7
Q
YOY Net Sales Growth
A
(3.6%)
8
Q
Dividend Yield
A
0.8%
9
Q
Sales by segment
A
67% sealant tech, 33% advanced surface tech
10
Q
sales by geography
A
66% NAM, 15% Asia Pacific, 18% Europe, 1% ROW
10
Q
Sales by channel
A
- 54% after market (used in modifying them)
- 46% OEM (original equipment manufacturer, used to actually make the equipment)
11
Q
Investment Thesis
A
- Sold bad businesses and focusing on sealants and ASTs, restructured business is better
- Because the semiconductor market is currently in a downswing, haven’t seen AST flex its organic growth and margin capabilities so its mispriced and believe that NPO is set for better than expected performance (especially margins wise)
12
Q
revenue & margins (historically)
A
- Was a boring low growth and low margin company
- Revenue grew at around 4% CAGR, swung up and down depending on semiconductor market and this was including in-organic growth
- Margins have hung around 15% prior to 2016
- It was spun-off from Goodrich due to Garlock case; was $1.3B liability but judge accepted the $125M figure proposed by the company
13
Q
spin-off history & how is it new now
A
- Been a decades long movement towards quality business; includes …
- In 2016, spun off their power system that eliminated exposure to auto engine manufacturing that is cyclical and competitive
- In 2019, spun off engineering materials that was low margin & no competitive advantage for them
- In 2017, acquired advanced surface tech (AST) which is highly sticky components & services business with high potential costs & strong growth potential
- In 2022, GGB; segment that was heavy weighted to original equipment (OE) with low margins
- Is entirely new business with 13 acquisitions and divestitures in the last 5 years
- In the past has been treated as a moderate growth industry business with heavy cyclical exposure, now EnPro is targeting business with higher aftermarket percentage, concentrated markets with low comp and higher margins
14
Q
cutting edge technology (historically)
A
- Have demonstrated their cutting edge technology through assisting Edwards Korea with a custom vacuum sealant
- They are focused on vacuum tech to limit microparticles and dust in semiconductors, aerospace, and space
- Struggling to find seal to operate in 200 degrees Celcius with leak rate of 10^-6 mbar/sec
- Was able to create custom Technetics’ HELICOFLEX
15
Q
semiconductor market right now (mispricing)
A
- Semiconductor industry experienced significant oversupply during 2021-2022, with inventories rising 25%+ through 2022
- Weak consumer demand in 2023 confounded strong inventory correction, contributing to significant downturn post 2022 (had too much inventory with too little demand)
- Current capacity utilization is well below long term average of around 80%
- Consensus is that semiconductor market has bottomed out and will normalize in 2025
- Most think that revenue growth, R&D spending, and capital spending will increase
16
Q
reaction in the OEM market (mispricing)
A
- Slowdown in semiconductor volumes has led to less CapEx build-out byOEMs
- Led to a reduction in what is being ordered and shipped in the OEM
- An example of this are ASML Lithography Systems, whose shipment decrease
17
Q
rebound position (mispricing)
A
- Semiconductor volume production is poised to rebound as excess supply normalizes and end market demand increases
- Seven consecutive quarters of semiconductor capacity utilization decline has stabilized; has stopped decreasing
- TSMC (Taiwan Semiconductor Manufacturing Company) who serves Apple, Nvidia, Qualcomm, receivables have spiked as chip demand inflicts upwards (has typically correlated with capacity utilization)
- Key IDMs (Integrated Device Manufacturers) like Intel and Samsung have increased orders anticipating stronger consumer demand
- Enpro’s backlog has started increasing from low in Q42023
18
Q
AST Technology in semiconductor market (mispricing)
A
-AST component business directly feeds into Tier 1 capital equipment manufacturers
- Tier 1: manufacture capital equipment for semiconductor production
- Tier 2: manufacturing basic components to be sold to fab equipment manufactures
- Tier 3: suppliers of basic materials to component manufacturers
- AST supplies specialized products to build new semiconductor manufacturing equipment
- Custom engineered components → sole source contracts → reliance on key suppliers
- AST input components are specifically engineered for specific client requirements
- Tier 1s will negotiate exclusivity for specific components to maintain edge
19
Q
reasons for mispricing
A
- Burnout from 20 years of liabilities and poor performance
- Investors have only seen AST during semi-trough
- Only three sell side analysts actively covering EnPro; no consensus estimates past 2025
- Low hedge fund activity, mostly passive ownership
68% of investors have very low portfolio turnover; less than 1% owned by hedge-funds
20
Q
multiple expansion
A
- Multiple expansion is just to reflect the new end markets they are a part of
- AST: that includes COHR (Coherent Corp.), ENTG (Entegris Inc.), UCTT (Ultra Clean Holdings Inc) and MKSI (MKSI Instruments) where the median EV/EBITDA is 19.8x
- Currently EnPro’s multiple is around 15.6x, historically was 10.8x
- ST: includes PH (Parker-Hannifin Corp), TREL (Transindia Real Estate) , FLS, SO (Flowserve Corp.) where the median EV/EBITDA is 11.6xt
21
Q
transistor density
A
- Betting against transistor density growth has been a historically poor choice
- Transistor density is the number of transistors that can be placed on microprocessor chip; higher transistor density allows for more processing power, efficiency, and functionality
- Predictions that it will plateau or growth will slow, but it hasn’t
- This is good for EnPro because higher transistor density requires sophisticated materials and manufacturing processes, which AST and ST can help with
- Tailwinds like the EV sales projection (13% CAGR) and storage sales (11.3% CAGR)
22
Q
geopolitical events & production sites
A
- US government has initiated efforts to increase domestic semiconductor production to reduce reliance on foreign manufactures, like Chica
- Can see a lot of EnPro’s production facilities are near where this is happening in the US, like China and Washington
- EnPro acquires $15M factory - 75K square feet - 5th largest in the US
- CHIPS act: provides significant funding and incentives for semiconductor manufacturing in US (still over $20M
- TSCM invests $35B into Arizona Facility; Intel invests $26.5B into Arizona Facility
- Arizona because of their focus on semiconductors, has a business friendly environment with favorable tax policies, streamlined regulations, and incentives, close to CA, has modern and durable infrastructure, lower costs for labor and real estate, etc.
22
Q
“copy exactly (CE!)” strategy
A
- Started by Intel that ensure identical tools perform identically upon installation
- Production of Fabs in the US is receiving heaving investment, facilities opening around the world
- Going to shorten the cycle by imitating tech from Taiwan
23
Q
AST Poised for Growth
A
- ASML (major customer) shifted from Deep Ultraviolet (DU) to Extreme Ultraviolet (EUV) lithography which led to a contraction YoY; projected to return to levels higher than pre-transition in 2025
- EUV uses a much shorter wavelength, uses more complex laser, uses mirrors
- ASML is a company focused in development and manufacturing of photolithography machines to produce computer chips, EnPro provides part
- These EUV enable smaller transistor and there are price hikes on premium options
- Backlog generated as Intel purchased entire 2024 supply of High NA EUV machines
- These are photolithography machines that transfer patterns that become transistors; put pattern that is developed and it acts like stencil for next steps
- New machines are less tested and will need more maintenance
- TSMC’s strategy of multi-stacking which involves stacking layers of materials or circuits to create complex and powerful semiconductor chips
- While has improved efficiency, has higher error rate while running
- Extrapolation as this has to be done in conjunction with trying to achieve 2nm chips
24
Q
smaller node good for EnPro
A
- As OEMs push for smaller, more efficient chips, TSMC has consistently spearheaded most advance tech in the semiconductor industry in both density & energy efficiency
- As the manufacturing process becomes more complicated, the environment becomes harsher, leading to more containment; making cleaning and maintaining tools difficult
25
Q
competitive advantage of EnPro
A
- Long term customers: use EnPro customers for 15 years on average; have specialized custom products
- EnPro has vertical integration: advanced manufacturing, cleaning services, advanced coating, refurbishment services
- Case study of Alluxa: have seen 99% customer retention rate with 13% YOY average price increase
- Switching costs: higher switching costs to new suppliers and cost $50K per product and time lost
- Product integration for other companies is 120 days, while for EnPro it is 50 days
Time incorporating EnPro’s product and services into semiconductor manufacturing process - Operational leverage
- Consolidation of facilities drives margin expansion as manufacturing is more efficient
- High portion of cost structure is fixed so profitability will benefit disproportionately as revenue increases
- Components are extremely sticky with high switching costs due to precision
- Case study Allexa continue to hike prices during broader semiconductor downswing
