Vishay Intertechnology (VSH) designs, manufactures and sells passive electronic components and discrete semiconductors. The company has grown over the last 5 decades by pursuing a strategy of growth through acquisitions. The current valuation of the company shares may be attractive to a value investor looking to get an exposure in the semiconductor sector.
The Value Thesis for Vishay
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The company shares trade at a Price to Book ratio of 1.21 (using the share price of $12.65 as of Feb 1, 2012 closing). This number may not seem too tempting at the first glance. A part of the reason is the $1.73 B in goodwill impairment the company took in 2008 which cut its equity down in half. This is a problem I see with companies that try to grow with acquisitions. When the times are good, they inflate their balance sheets with intangibles and goodwill, that buffers the earnings. When the industry cycles down, as was the case in 2008, the previous years of “great earnings” are neutralized with an asset write down (impairment of the goodwill asset is a charge on the income statement)
The positive side of this is that Vishay has already taken the impairment charge so its financials are relatively clean now. In the last 4 quarters, the company has grown its book value from $1.49 B to $1.65 B, or about 10% in a little over a year.
It makes sense to judge the valuation based on the earnings, rather than the book, and we will take note of the following:
As of Feb 1, 2012, the company had
- Stock Price: $12.65
- Market Value: $1.99 B
- Cash on hand: $1.035 B (mrq, Sep 2011 quarter)
- Debt: $423 million
After adjusting for the $59.5 million in one time tax benefit Vishay took in the Dec 2012 quarter (or $0.31/share), the company earned $1.7/share in the trailing 12 months giving it a trailing P/E of 7.44. However, most of the $1.035 B in cash on its books is non essential and can be distributed to the shareholders without any material impact on the company’s future operations (Vishay intends to use the cash for future acquisitions as part of its growth strategy). I adjusted the P/E calculation further by discounting the price by the distributable cash, which I estimate to be around $5.73/share. This leads us to a trailing P/E of 4.07. If the operations continue to generate 11% in net profit margin as they have averaged for the previous 5 quarters, than the stock can potentially find its true value to be around a (ex cash) P/E ratio of 9, which gives it a target price of $21/share. However, this is not a given as the historical profit margins are much closer to 5%-6% range, which reflects the competitive nature of the industry as well as the fact that the customers have greater buying power than the suppliers like Vishay due to their size and concentration.
There are Other Risks
Vishay’s Class B shares control almost half the voting power (1 Class B share has 10 votes compared to 1 Class A shares with 1 vote). Since substantially all Class B shares are in private hands and not traded on the market, the possibility of Vishay being an acquisition target is remote. It is also difficult for an activist investor to get on the board and initiate changes to unlock the value. This can keep the share price depressed below its intrinsic value for a long period of time.
Vishay is also more susceptible to currency fluctuations and political events as over 70% of its production and revenues are overseas, with a significant presence in mid-east (Israel). It can work for or against the share price and introduces a level of uncertainty.
While the value is there, whether you chose to buy the stock at the current prices will depend on your assessment of these external risks. If you do chose to initiate a position, it may be wise to keep it a small portion of your portfolio and increase your position if the gap between value and price increases.