VISHAY INTERTECHNOLOGY INC VSH
December 29, 2021 - 3:11pm EST by
Bill
2021 2022
Price: 22.00 EPS 2.32 3
Shares Out. (in M): 146 P/E 9.5 6.5
Market Cap (in $M): 3,200 P/FCF 7.6 5.7
Net Debt (in $M): -465 EBIT 452 640
TEV ($): 2,736 TEV/EBIT 6 4.3

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Description

Vishay (VSH) is a compelling buy, with short-term upside potential of 100%+, and longer-term upside of much more. VSH represents a very rare opportunity to own a high-growth, under-the-radar stock, at a deep discount valuation, and in a high growth industry. VSH also has several near-term catalysts that should propel the stock higher. The company manufactures a huge variety of power electronics components, which are probably embedded within several devices you use every day.  VSH seems at the initial stage of a growth inflection that should last for the foreseeable future. VSH’s industry is currently undergoing a large step-function in demand growth, driven by the progressive electrification and digitization of our society, due to the proliferation of EVs, 5G devices, wearables, and the Metaverse. This strong industry backdrop should enable VSH to grow much faster than historically, and significantly above consensus expectations, leading to a much higher valuation for the stock, which is currently trading at a dramatically depressed multiple. VSH is also a hidden electric vehicle (EV) play, because the company derives 30% of its revenues from the automotive industry. Each EV requires significantly more power electronics components per EV vs traditional gas cars, dramatically increasing the company’s TAM.

Valuation:

VSH seems substantially undervalued on both a relative and absolute basis, currently valued at a FY22 P/E, EV/EBITDA and adjusted FCF yield of 3.2x, 6.5x and 18%. I estimate the stock is currently worth anywhere between $45-$50, and could go much higher over the mid/long-term. I base my view of fair for VSH on assuming a very reasonable P/E, EV/EBITDA, FCF yield, of approximately 13.3x, 7.5x and 9% on my FY22 estimates. I view these target multiples as very conservative because most other companies in VSH’s sector currently trade at or above these levels, with less favorable characteristics. Also my DCF analysis results in a fair value for VSH in the $60+ range. I expect the company to achieve 10-15% annual revenue growth over the next 5 years, driving annual EBITDA growth of 15-20%, and adjusted EPS growth of 20-25%, as margins expand, and the company deploys its excess cash. 

Why Does This Opportunity Exist?

The dramatic under-valuation for VSH exists for several reasons; 1) It is an underfollowed and small company; 2) Management is not promotional; 3) The huge growth inflection has only recently occurred, and the market has not fully absorbed this change within VSH’s valuation due to the previous two reasons. Traditionally the market has valued VSH like an undervalued deep cyclical, but my thesis it that its now a growth company, and deserves at least a sector average multiple, and the sector multiple should expand.

The evidence that VSH is in an extended growth cycle seems clear by analyzing their last several quarters and a variety of industry news. VSH’s growth inflection was best verbalized by the company’s CEO (Gerald Paul) on VSH’s 3Q21 EPS results conference call on 11/3/21:

“Let me summarize and let me emphasize the following: Clearly we… enjoy very favorable economic conditions, and the end of the positive phase of the current cycle is not in sight. But, I think much more important beyond all short-term speculations, the longer-term outlook for electronics and also for components is remarkably bright. We expect noticeably higher growth rates for our products going forward than we have seen them in the past.”

I estimate growth for the companies’ products will accelerate for years to come, driven by the next wave of electrification/digitization which our economy is currently undergoing. Even if I’m wrong about accelerating growth, VSH looks significantly undervalued in a no growth scenario, which I view as extremely unlikely.

The company also has a rock-solid balance sheet with over $920 mil of cash, and $465 in net cash, and generated over $267 mil FCF in the TTM, which I expect to grow going forward. Given VSH’s overcapitalized balance sheet, I expect them to announce a sizable share repurchase sometime soon, which could be a good near-term catalyst for the stock.

The Company:

According to VSH’s 10k,

Vishay was founded in the 1950s, and currently “manufactures one of the world’s largest portfolios of discrete semiconductors and passive electronic components that support innovative designs in the automotive, industrial, computing, consumer, telecommunications, military, aerospace, and medical markets. Serving customers worldwide, Vishay brands itself as The DNA of tech.™

Semiconductors include MOSFETs, diodes, and optoelectronic components. Passive components include resistors, inductors, and capacitors.  Our semiconductor components are used for a wide variety of functions, including power control, power conversion, power management, signal switching, signal routing, signal blocking, signal amplification, two-way data transfer, one-way remote control, and circuit isolation. Our passive components are used to restrict current flow, suppress voltage increases, store and discharge energy, control alternating current (“AC”) and voltage, filter out unwanted electrical signals, and perform other functions.

 

Product Segments

 

Our products can be divided into two general classes: semiconductors and passive components. Semiconductors are sometimes referred to as “active components” because they require power to function whereas passive components do not require power to function. 

 

Semiconductors

 

Our semiconductor products include metal oxide semiconductor field-effect transistors ("MOSFETs"), diodes, and optoelectronic components. Semiconductors are typically used to perform functions such as switching, amplifying, rectifying, routing, or transmitting electrical signals, power conversion, and power management.

 

MOSFETs Segment

 

MOSFETs function as solid state switches to control power.  Our MOSFETs business includes both the commodity and non-commodity markets in which we believe that we enjoy a good reputation and strong brand recognition (Siliconix). MOSFETs applications include mobile phones, notebook and desktop computers, tablet computers, digital cameras, televisions, DC/DC and AC/DC switch mode power supplies, solar inverters, automotive and industrial systems. We are a leader in low-voltage TrenchFET MOSFETs and also offer high-voltage MOSFETs. Our MOSFETs product line includes low- and medium-voltage TrenchFET MOSFETs, high-voltage planar MOSFETs, high voltage Super Junction MOSFETs, power integrated circuits (power ICs), and integrated function power devices. We are one of the technology leaders in MOSFETs, with a tradition of innovation in wafer design, packaging, and performance.

 

Diodes Segment

 

Diodes route, regulate, and block radio frequency, analog, and power signals; protect systems from surges or electrostatic discharge damage; or provide electromagnetic interference filtering.  Our Diodes business is a solid business with a strong market presence in both the commodity and non-commodity markets. The products that comprise our Diodes business represent our broadest product line and include rectifiers, small signal diodes, protection diodes, thyristors/SCRs and power modules. The primary application of rectifiers, found inside the power supplies of virtually all electronic equipment, is to derive DC power from the AC supply. Vishay is the worldwide leader in rectifiers, having a broad technology base and a good position in automotive, industrial, computing and consumer markets. Our rectifier innovations include TMBS® using Trench MOS barrier Schottky rectifier technology, which reduces power loss and improves the efficiency of end systems and eSMP®, the best in class high-current density surface mount packages. Our wide selection of small signal diodes consist of the following functions: switching, tuning, band-switching, RF attenuation and voltage regulation (Zener). They are available in various glass and plastic packaging options and generally are used in electronic circuits, where small currents and high frequencies are involved. Vishay is also one of the market leaders for TVS (transient voltage suppressor) diodes. The portfolio of protection diodes includes ESD protection and EMI filter. Our thyristors or SCR (silicon-controlled rectifiers) are very popular in the industrial high-voltage AC power control applications. The fast growing markets of solar inverter and HEV/EV are the focus of our power modules business (IGBT or MOSFET modules). These modules can be customized to fit in different customer design requirements.

 

Optoelectronic Components Segment

 

Optoelectronic components emit light, detect light, or do both.  Our Optoelectronic Components business has a strong market presence in both the commodity and non-commodity markets.  Our broad range of standard and customer specific optoelectronic components includes infrared (“IR”) emitters and detectors, IR remote control receivers, optocouplers, solid-state relays, optical sensors, light-emitting diodes (“LEDs”), 7-segment displays, and IR data transceiver modules (IrDA®). Our IR remote control receivers are designed for use in infrared remote control, data transmission, and light barrier applications in end products including televisions, set-top boxes, notebook computers, and audio systems. We are the leading manufacturer of IR remote control receivers. Our optocouplers electrically isolate input and output signals. Uses include switch-mode power supplies, consumer electronics, telecommunications equipment, solar inverters, and industrial systems. Our IR data transceiver modules are used for short range, two-way, high-speed, and secure wireless data transfer between electronic devices such as home medical appliances, mobile phones, industrial data loggers, and metering. Our optical sensors product line was considerably strengthened by our acquisition of Capella in 2014.  Our optical sensors products include ambient light sensors, optical encoders, integrated photodiode and I/V amplifiers, proximity sensors, color sensors, and UV sensors.  Applications include telecommunications, mobile phones, smartphone, handheld devices, digital cameras, laptops, desktop computers, LED backlighting, office automation equipment, household electrical appliance and automotive electronics.  Our LEDs are designed for backlighting and illumination in automotive and other applications. Our LEDs include ultra-bright as well as small surface-mount packages, with products available in all standard colors including white.

 

Passive Components

 

Our passive components include resistors, inductors, and capacitors. Passive components are used to store electrical charges, to limit or resist electrical current, and to help in filtering, surge suppression, measurement, timing, and tuning applications.

 

Resistors Segment

 

Resistors impede electric current.  Resistors are basic components used in all forms of electronic circuitry to adjust and regulate levels of voltage and current.  Our Resistors business is our original business. We maintain the broadest portfolio of resistor products worldwide.  Under current market conditions, the business is solid, predictable, and growing at relatively stable selling prices.  We are a market leader with a strong technology base, many specialty products, and strong brand recognition (such as our Dale, Draloric, Beyschlag, and Sfernice brands). We focus on higher value markets in specialized industries, while maintaining a complete portfolio of commodity products.  We do not aim to be the volume leader in commodity markets.

 

Resistors vary widely in precision and cost, and are manufactured from numerous materials and in many forms.  Linear resistive components are classified as variable or fixed, depending on whether or not their resistance is adjustable. Non-linear resistors function by varying in resistance under influence of temperature (thermistors) or voltage (varistors). They can be used in temperature-measuring applications or as current or voltage-limiting devices. We manufacture virtually all types of fixed resistors, both in discrete and network forms, as well as many variable types.

 

Inductors Segment

 

Inductors also impede electric current.  Inductors use an internal magnetic field to change alternating current phase and resist alternating current.  While part of our traditional business, the inductors product line has grown significantly in recent years.  We are a market leader with a strong technology base, many specialty products, and strong name recognition (such as our IHLP® and HiRel Systems brands). We focus on higher value markets in specialized industries, such as the industrial, automotive, military, and medical end markets.

 

Inductor applications include controlling AC current and voltage, filtering out unwanted electrical signals, and energy storage. Vishay inductor innovations include our patented IHLP low-profile, high-current inductor technology with industry-leading specifications. Our low-profile, high-current inductors save circuit board space and power in voltage regulator module (“VRM”) and DC to DC converter applications. In addition, we are a worldwide leader in custom magnetic solutions focusing on high performance and high reliability.

 

Capacitors Segment

 

Capacitors store energy and discharge it when needed.  Our Capacitors business consists of a broad range of reliable, high-quality products. We have a strong presence worldwide in specialty markets based on our product performance and reliability and strong brand recognition (including our Sprague, Vitramon, Roederstein, BCcomponents, and ESTA brands). We focus on higher value markets in specialized industries, while maintaining a complete portfolio of commodity products. We do not aim to be the volume leader in commodity markets. Capacitors are used in almost all electronic circuits. They store energy and discharge it when needed. Important applications for capacitors include electronic filtering for linear and switching power supplies; decoupling and bypass of electronic signals for integrated circuits and circuit boards; and frequency control, timing and conditioning of electronic signals for a broad range of applications.

 

We manufacture products based on all major capacitor technologies: tantalum (molded chip tantalum, coated chip tantalum, solid through-hole tantalum, wet tantalum, and polymer), ceramic (multilayer chip and ceramic disc), film, power, heavy-current, and aluminum electrolytic. Our capacitors range from tiny surface-mount devices for hearing aids and mobile devices to large power correction capacitors used in renewable energy, heavy industry, and electrical power grids. We are a recognized technology leader in many product ranges, securing our strong position in military and medical markets, and in a wide range of industrial and automotive applications. Our wet tantalum and MicroTan™ technologies are market leaders.

 

Military Qualifications

 

We have qualified certain of our products under various military specifications approved and monitored by United States government agencies, and under certain European military specifications. Qualification levels are based in part upon the rate of failure of products. In order to maintain the classification level of a product, we must continuously perform tests on the product and the results of these tests must be reported to the government agencies. If the product fails to meet the requirements for the applicable classification level, the product’s classification may be reduced to a lower level.  During the time that the classification level is reduced for a product with military application, net revenues and earnings attributable to that product may be adversely affected."

The company’s presentation (attachment below) gives a very good summary of recent metrics and I recommend everyone take a look if you have the time.

https://s24.q4cdn.com/611577612/files/doc_financials/2021/q3/VSH-2021-Q3-Presentation-Investor-Total.pdf

Balance Sheet and Cash Flow:

VSH has a rock-solid balance sheet with over $920 mil of cash and equivalents, and $465 in net cash, and generated over $267 mil FCF in the TTM. The company has a long history of generating a significant amount of free cash, and management has been very conservative regarding deploying these funds. I estimate the company will generate adjusted FCF in FY22 of $580 mil, representing a FCF yield of 19%, demonstrating the deep value in VSH stock. However, my adjusted FCF yield only assumes maintenance capex of $80 mil. In reality, VSH will probably spend an additional $120 mil in growth CAPX, still resulting in FCF of $460 mil, which I expect to be mostly utilized for a large share repurchase. VSH has the ability to easily buy-back 1/3+ of the shares outstanding while maintaining a healthy balance sheet.  

Income Statement:

I forecast the company will generate FY22 revenues of around $3.5 bil and EPS of at least $3, versus consensus of $3.2 bil and $2.29. Consensus seems to have missed the obvious EPS drivers, and is only estimating flat EPS and revenues from FY21-FY22, which does not seem to make sense given the strong demand for VSH’s products, their record backlog, and potential to buyback a tremendous amount of stock. VSH’s book-to-bill has been above 1.25x for the last four quarters, and their backlog is at all time highs. VSH’s strong growth is occurring despite weakness in the automotive market, which comprises 30% of the company’s revenues, and has slowed-down due to chip shortages. I forecast automotive production, digitization, and electrification will grow significantly over the next few quarters, and this dynamic will further accelerate VSH’s growth.  To note, VSH has the ability to raise EPS 30%+ through share repurchases alone, assuming no revenue growth. However, I expect revenues to growth 10-15% for the foreseeable future. In my FY22 estimates I am only assuming 10% revenue growth, and no share repurchases.

Catalysts:

There are several catalysts for VSH including the following: 1) The potential for large share repurchases as outlined above. VSH management mentioned several times on their last EPS call that they were seriously evaluating a share repurchase which they have done in past years; 2) Earnings and revenues above consensus; 3) Multiple expansion as the market absorbs the fact that VSH is now a growth company; 4) The potential for the VSH to be acquired, or for activist investors to emerge.

Risks:

Risks include the following: 1) My thesis is wrong, and we move into a cyclical downturn in power electronics components. However, in all but the direst scenarios, VSH stock continues to look dramtically undervalued; 2) the general risks mention in VSH’s 10k.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

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