Buy Entegris (NSDQ: ENTG)

Target: $52

Buy Up To: $37

Options Trade: Buy to open the November 16, 2018 call on Entegris (NSDQ: ENTG) with a strike price of $35 at $3.00 or lower. Symbol (ENTG181116C35)

*Note: these options are very thinly traded so be patient and do not chase the price

Rationale:

Fears of lower memory chip pricing have hit almost the entire semiconductor sector. This has left some terrific bargains on the table. While it’s possible there is a slight dip in spending for some semiconductor equipment, most consumable products or those necessary for 3D Nand build-outs should be insulated.

Three-quarters of Entegris’ revenue is from consumable materials, used in the daily production cycles at semiconductor labs. These are highly specialized materials, solutions that management describes as “sticky” because they are difficult to swap out for a substitute.

The company hosted an analysts’ day yesterday and confirmed that business is on track.

1. 75% of revenue is derived from what can be considered consumable materials, this portion of revenue is not dependent on new factories or lines being built.
2. Only half of its revenue is from semiconductor customers and its largest customer, Taiwan Semiconductor, accounts for just 13% of total revenue, lessening the risk of a major slowdown at a large customer.
3. Entergris’ recent purchase of SAES gas purification systems should increase already high levels of profit margins.
4. Thanks to improving product margins and controlled spending, operating profits are growing much faster than revenue growth. In the past twelve months profits grew 55% and are expected to grow 33% this year.
5. Earnings will be announced on July 26.