This Industrial Business Could be a Good Pick Now

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since the beginning of the year, Entegris (NASDAQ: ENTG) has not performed well, returning only 7.2%, much lower than S&P 500’s return of more than 17.8%. Entegris is in the portfolio of several famous investors including Steven Cohen, Jim Simons and Chuck Royce. Is this stock a good buy for investors at its current trading price? Let’s find out.

Fluctuating revenue and profits, but strong balance sheet

Entegris, incorporated in 2005, is considered a global manufacturer of more than 17,000 standard and customized products and materials used in processing and manufacturing in the microelectronics industries. It has three main business segments: Contamination Control Solutions, Microenvironments and Specialty Materials. Most of its revenue, $461.8 million, was generated from the Contamination Control Solutions segment. The Contamination Control Solutions segment was also the biggest income contributor with $116.35 million in operating income, while the operating profits of the Microenvironments and the Specialty Materials came in at $37.2 million and $12.3 million, respectively.

In the past five years, Entegris has experienced fluctuating revenue and net income. While revenue stayed around $399 million to $749 million in the period of 2008 – 2012, its net income fluctuated in the range of $(517) million to $124 million during the same period. In 2012, Entegris produced $716 million in revenue and $69 million in net profits, with free cash flow of $65 million. What I like about Entegris is its strong balance sheet. As of March 2013, it had $703 million in equity, $339 million in cash and no debt. The goodwill and intangible assets were quite low as well, at only $45 million. Thus, its tangible book value was $658 million.

Peer comparisons

Entegris is trading at around $9.90 per share, with a total market cap of $1.4 billion. The market values Entegris at around 14.3 times its forward earnings. Compared to its peers, including Pall Corporation (NYSE: PLL) and Parker-Hannifin Corporation (NYSE: PH), its valuation is in the middle of the two peers. Pall is the most expensively valued--at $70.60 per share, Pall is worth around $7.88 billion on the market. The market values Pall at as much as 20.2 times its forward earnings. Pall is considered a global leader in filtration, separation and purification, with diverse end markets. For the full year 2013, the company expected to have flat sales, excluding the foreign exchange impact. Its EPS was estimated to come in at $2.95 to $3.05 per share. Pall pays some dividends to its shareholders, with a yield at 1.4%.

Parker-Hannifin is the cheapest valued among the three companies. At $99.20 per share, the company was worth around $14.90 billion. The market values Parker-Hannifin at 13.5 times its forward earnings. Parker Hannifin is the maker of motion and control technologies, including electromechanical controls and fluid power systems, and it is considered the leader in the motion & control industry. Looking forward, Parker-Hannifin expected to grow its sales by 12%, including 8% organic growth and 4% value added acquisitions. In terms of organic growth, the company would focus on high growth emerging markets, including China, India, South East Asia and Latin America, expanding its distribution network around the world, with more than 13,000 outlets, and improving its retail channel with 2,092 stores globally. Parker Hannifin pays the highest dividend yield among the three, at 1.8%.

My Foolish take

If the $2.40 per share in cash on the balance sheet was excluded, Entegris’ earnings valuation would drop to around 12. With the conservative capital structure, positive free cash flow and a huge amount of cash, Entegris seems to be a decent pick at its current price. According to Barron’s, Entegris could also win from collaboration with customers, being a partner in about 25 joint-development projects. It thought the company’s share price could reach $14 in a year or two, a more than 40% premium to its current trading price.

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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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