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On Jan 9, 2014, we downgraded our recommendation on MKS Instruments, Inc. (MKSI - Analyst Report) to Neutral from Outperform. Despite an increase in product launches, loss due to negative impacts from the foreign currency translation is a matter of concern and primarily led to the recommendation downgrade.

Why the Downgrade?

MKS Instruments operates in a highly competitive market. In the semiconductor-related industry, major portion of the revenues is generated through company-owned patents. However, in situations where these patents are not renewed, the company may face a major blow.

Additionally, in order to remain competitive and sustain its performance over the long term, MKS Instruments needs to keep inventing products. However, a product development may take as long as 30 months, during which any other player may develop an identical product.

MKS Instruments’ major customers, the semiconductor equipment manufacturers, are based in regions outside the U.S. such as Japan, Taiwan and Korea. This exposes the company to foreign currency fluctuation risks. Moreover, the socio-political and economic risks associated with these regions raise concerns.

MKS Instruments is trying to counter these headwinds through product launches which in turn will lead to market share gain. The possible use of sapphire in mobile displays, by replacing glass, opens up additional opportunities for the company, given its multiple sapphire production tools. These products are expected to drive the company’s revenues. Also, MKS Instruments has a strong and loyal customer base.

Other Stocks to Consider

This Zacks Rank #3 (Hold) company has a current market capitalization of $1.6 billion. Some better-ranked stocks in the industry include Advanced Energy Industries, Inc. (AEIS - Snapshot Report), Finisar Corp. (FNSR - Snapshot Report) and Alliance Fiber Optic Products Inc. (AFOP - Snapshot Report). While Advanced Energy Industries and Finisar Corp. carry a Zacks Rank #1 (Strong Buy), Alliance Fiber Optic Products holds a Zacks Rank #2 (Buy).

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