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Why Is MKS Instruments (MKSI) Down 6.7% Since Last Earnings Report?

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A month has gone by since the last earnings report for MKS Instruments (MKSI). Shares have lost about 6.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is MKS Instruments due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

MKS Instruments’ Q4 Earnings Beat, Revenues Rise Y/Y

MKS Instruments reported fourth-quarter 2019 adjusted earnings of $1.20 per share, which beat the Zacks Consensus Estimate by 13.2% but slumped 22.1% year over year. The decline was primarily due to lower operating margin.

Revenues of $499.7 million beat the consensus mark by 5.9% and increased 8.5% year over year, driven by increased demand in the semiconductor market.

Products revenues (85.4% of total revenues) were $426.5 million, up 6% from the year-ago quarter. Services revenues (14.6%) increased 25.8% year over year to $73.2 million.

Quarter Details

Revenues from the semiconductor market (54.3% of total revenues) increased 15.7% year over year to $271.4 million. Sequentially, revenues increased 22%, driven by strong logic and foundry spending as well as the recovery of memory capital expenditure.

Revenues from advanced markets (45.7% of total revenues) were $228.3 million, up 1% from the year-ago quarter. The slight increase was due to stabilization of the company’s light and motion business.

Segment-wise, Vacuum and Analysis (56% of total revenues) revenues were $279.8 million, up 8.4% year over year, driven by strong volume orders for RF generators.

Light and Motion division revenues (35.3% of total revenues) were $176.5 million, down 12.8% year over year.

Equipment & Solutions segment revenues (8.7% of total revenues) were $43.3 million.

Operating Details

In the fourth quarter, MKS Instruments’ adjusted gross margin contracted 230 basis points (bps) on a year-over-year basis to 43.3%.

Adjusted EBITDA decreased 12.2% year over year to $107.9 million. Adjusted EBITDA margin was 21.6%, significantly down from 26.7% reported in the year-ago quarter.

Research & development (R&D) and sales, general & administrative (SG&A) expenses, as a percentage of revenues, expanded 130 bps and 170 bps, respectively.

Management stated that the company has been successful in saving $13 million on an annual basis and is on track to achieve $15 million of cost synergies annually.

MKS Instruments reported non-GAAP operating income of $92.1 million, down 15.7% year over year. Adjusted operating margin was 18.4%, down from 26.7% reported in the year-ago quarter.

Balance Sheet & Cash Flow

As of Dec 31, 2019, MKS Instruments had cash and short-term investments of 524 million compared with $475 million as of Sep 30, 2019.

Secured term-loan debt outstanding as of Dec 31 was $892 million.

MKS Instruments paid out dividends worth $11 million during the reported quarter.

First-Quarter Guidance

For the first quarter of 2020, MKS Instruments anticipates revenues between $495 million and $545 million. Management expects strong semiconductor capital spending to continue. Moreover, advanced market is expected to witness stable revenues and a modest increase in equipment solution revenues.

Non-GAAP gross margin is expected between 43% and 45%.

Non-GAAP operating expenses are expected in the $128-$136 million range. R&D expenses are expected between $43 million and $46 million, while SG&A expenses are anticipated in the $85-$90 million range.

Non-GAAP earnings are expected between $1.14 and $1.49 per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

At this time, MKS Instruments has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

MKS Instruments has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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