Description

Vishay Intertechnology, Inc. (VSH)

Thesis

• Supplier of discrete semiconductors and passive electronic components with favorable supply-demand outlook over next few years trades at attractive (value) multiple; ascension of new management team should help improve company’s IR and operational profile; solid cash generation
• Industry is transitioning to lower cyclicality than in the past
  • More diverse drivers of demand are lowering overall industry cyclicality; similar to what has happened over recent years with traditional semiconductors, discretes and passive components are benefiting from increasing ubiquity of electronics across a more diversified range of demand drivers (PC → PC + phone → PC + phone + industrial + auto)
  • VSH saw improved 400bp GM compression in 2019 downturn (pre-COVID) vs 600bp compression following 2010 (prior) peak
• Company is currently capacity constrained; more broadly, industry is reportedly capacity constrained
  • Industry curtailed capacity expansions following 2019 downturn
  • VSH is currently operating at full capacity; has announced meaningful capacity expansions that will begin coming online in 2023
  • Sees “extreme” growth potential over next five years from automotive, particularly EVs (which have step function increase in avg content per vehicle compared to ICE); also see meaningful future demand from industrial applications
  • Growth trends are being confirmed by key customers; customers are now engaging in discussions/negotiations for non-cancelable orders (unusual for the industry)
  • Company was running book-to-bill in excess of 1.0x from late 2020 thru 2022 3Q, at times as high as 1.7x
  • Key value-added products (MOSFETs, resistors) remain capacity constrained today with backlogs in excess of 1 year
• Significant capacity expansion plans are underway
  • Multiple initiatives are currently underway to reduce capacity constraints
  • $1.2bn capex plan; management has indicated that it expects a “better than 1:1 revenue return” on the capex dollars; back of the envelope implied incremental revenue of >$1bn, which would represent a roughly 30% increase from current run-rate levels
  • Much of the incremental planned capacity is already committed
• Business line assessment currently in process
  • Business segments with subpar margins (and no reasonable chance of improvement) will be considered candidates for divestiture
  • Management currently engaged in discussions to shift commodity product manufacturing to subcontractors in order to free capacity for higher value-added products
• Prior concerns about upside operating leverage have been largely laid to rest
  • Over the course of 2021, investors expressed concern over the company’s seeming inability to expand margins in a capacity constrained market despite the strong demand environment and a growing top line (gross adj EBITDA actually declined between 2Q and 4Q 2021, with mgns ↓100bp)
  • Management’s explanation for the lack of margin expansion was that it had been preferencing OEM customers vs distributors
    • This preferencing was margin-dilutive as OEM contracts are negotiated fixed price vs sales through distribution where pricing can be adjusted immediately
    • Priority for OEMs was granted in order to lock-in the highest value customers
  • Subsequent price increases and improved flow-thru laid these concerns to rest; GMs in 2022 hit a 22-year high and EBITDA margins hit a 10+ year high
• Leadership transition
  • Newly appointed CEO and COO
    • Former CEO (Dr. Gerald Paul) retired at year-end 2022 after 17 years in top spot
    • Former EVP, Business Development (Joel Smejkal) became new CEO
      • 32-year career at Vishay; roles covering engineering, marketing, sales, operations, and business development
      • Had previously served VSH as EVP, Business Head Passive Components and SVP Global Distribution Sales
      • He is reportedly more outward facing than current CEO and is likely to meaningfully increase engagement with both customers and investors
      • Has also been instrumental in recent years in helping pivot the company to new growth customers, markets, and opportunities
    • Former EVP, Business Head Passive Components is now the new COO; COO role had been vacant for a number of years
  • Company founder passed away ~10 years ago; current Chairman (Marc Zandman) is son of company founder; has spent past 5+ years upgrading BOD to transition away from legacy as family-controlled business to one more appropriate for public company
  • Management transition is an important component of the company’s shift from what has historically been a focus on cash flow maximization at the expense of growth opportunities to a more equal balance between cash flow generation and growth opportunities
• Recent formalization of capital return program
  • Target of at least 70% of FCF to be returned to shareholders through combination of dividends and share repurchases
  • Resumption of share repurchase program in 2022 ($83mm) for first time in four years
• Two competitors (AVX, Kemet) have been taken out in past couple of years
• Decent quality business
  • Multi-decade average mid-teens ROICs and ROEs; in more recent years has posted 20%+ ROICs/ROEs as a result of more constrained supply environment
  • Much more stable margins than competitors: GM drawdowns peak-to-trough typically 500-1000bp favorable to competition
  • Consistent cash flow generation throughout cycle: has generated positive OCF and FCF every single year in past 20 years
• Strong balance sheet: ~$3/shr net cash
• Valuation
  • ~$160mm trailing LTM FCF in year that was heavily burdened with growth capex; 6% yield to equity
  • ~$240mm FCF in 2021 (more normalized capex year); 8% yield to equity
  • Currently trades for 4x EBITDA, 9x EPS

Business

• Combination of passive and active electronic components
  • Passive: resistors, capacitors, inductors
  • Active: MOSFETs (“Metal–Oxide–Semiconductor Field-Effect Transistor”), diodes, optoelectronics
• 2022 revenue breakdown
  • Sales channels = OEM 35%, distributors 58%, EMS 7%
  • End markets = Industrial 39%, Auto 31%
  • Geographic = Asia 38%, Europe 33%, Americas 29%
• Higher value-add (based on GM) = resistors, MOSFETs, inductors, optoelectronics; total ~65% of total

Upside/Downside

• We use a mid-cycle EPS for our target valuation
• Assume $700mm of incremental revenue from current capacity expansions; note that this is well below the implied $1bn+ that management believes the capacity expansion may ultimately yield
• Assumed peak EBITDA margins (next cycle) of 21%; below prior cycle peak margins (22%)
• Yields mid-cycle EBITDA of ~$685mm and mid-cycle EPS of ~$2.50/shr
• Apply 12.7x P/E multiple based on average relative multiple of 0.7x the S&P
• Downside based on typical trough 1.3x BV
• Yields attractive 55% up vs 10% down skew
• To the extent the company’s pivot towards a more balanced growth+ cash flow profile is successful, we believe there could be meaningful multiple expansion vs prior

Risks

• Near-term demand weakness; book-to-bill has once again fallen below 1x; channel inventory correction currently underway; management’s expectation that weakness will be short-lived could prove wrong
• Meaningful capacity expansion in the face of near-term demand weakness; capacity expansion is expected to last for up to three years
• Business is cyclical; not immune from global macro trends
• Dual class share structure: Class B = 10 votes; Zandman trust controls 43% of total voting power; Class B shares control 48% of voting power in aggregate

As of the publication date of this report, we have long positions in the stock of Vishay Intertechnology, Inc. (“Vishay”). We stand to realize gains in the event that the price of the stock increases. Following publication of this report, we may transact in the securities of the company covered herein. All content in this report represents our opinions. We have obtained all information herein from sources we believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to change without notice, and we do not undertake to update or supplement this report or any information contained herein. This report is not a recommendation to buy the shares of any company, including Vishay, and is only a discussion of why we are long Vishay.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment or security discussed herein or of any of our affiliates. This document is for informational purposes only. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. Our opinions and estimates constitute a best efforts judgment and should be regarded as indicative, preliminary and for illustrative purposes only.  The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. Our forward-looking assumptions, expectations, projections, intentions or beliefs about future events may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond our control. Investors should conduct independent due diligence on all securities discussed in this document and develop a stand-alone judgment of the relevant markets prior to making any investment decision.

Catalyst

 Stabilization of current inventory correction; capacity expansion comes online and drives favorable revision to EPS power; takeout