Filtering for Value and Growth: Entegris

It's not often you find a company getting high praise everywhere from mutual fund

managers

and top research outlets all the way down to message boards and water

coolers that's been

trading in one direction: sideways. It is also rare to find a stock

trading at the same price it

did a year ago with almost the same amount of shares

outstanding, a fraction of the

debt, and

twice the revenues. The company is Entergis

(ENTG), they earned $0.26

per

share in the first

half of this year, and the stock still

trades under five bucks a share.

Entergis is a capital equipment supplier to semiconductor companies. In other words, they
make the stuff that semiconductor makers buy to make the stuff that equipment makers buy
to make the stuff that goes into the toys that you and I buy. Phew! More specifically, they
provide solutions to control contamination in the semiconductor manufacturing process such
as liquid and gas filtration products. They also offer products to handle, ship and stor
wafers, reticles and data storage devices without destroying them. The company's solutions
are used to make an enormous range of semiconductor goods as well as liquid crystal

displays (LCD) and hard disk's.

The future for Entergis' products

frankly could not look better,

as they

will be needed increasingly as new,

more efficient processes are

employed.

The stock has only been trading

sideways for about a year now,

before that, things were a

little more

interesting. Early in the last decade,

earnings bounced around and so

did the

stock. The company had

around 70 million shares

outstanding at that time, and those

shares fluctuated in value between

the mid to high single digits and the

high teens. Back

then the company

had a much smaller range of products and customers so earnings were less predictable.
Then in late 2005 early 2006, things changed. The company merged with Mykrolis Corp
which significantly broadened their market spectrum, adding the liquid & gas filtration and
wafer shipping & handling products that are the core of their business still to this day. This
was essentially a merger of equals, so shares issued and outstanding almost doubled to
where they are today, around 130 million. Revenues also doubled, margins improved, and
solidity came back to their earnings. Stability came back to the stock as well, which
fluctuated only between 8 and 12 bucks over the next two years with a slight upward bias.

A more diverse market for Entegris also made it more susceptible to overall economic
conditions and the pace of IT spending as a whole. When the recession hit in 2008 and
2009, revenues slipped substantially, and the company began to lose money. Things were
so bad in fact that they were forced to take a $1/2 billion goodwill impairment charge and
engage in a less than desirable credit facility. The stock tanked to as low as 50 cents in early
2009 on bottom line numbers but keep in mind that revenues only decreased from $626 to
$554 and $398 million in 2007, 2008 and 2009 respectively.

Over the next year or so until now, Entegris' turnaround has been swift. Revenues bottomed
in the first quarter of 2009 and began to pick back up. In the last quarter of 2009, revenues
increased enough to bring their bottom line numbers back into the green. So far this year,
revenues for the first two quarters totaling $328 million foreshadows a 2010 that will be on
par or even better than the 2006, 2007 revenues. Margins have improved even more this
time around, and the increased cash flow has allowed them to pay off that pesky little credit
facility early.

The company says that things will be even better in the second half of 2010, although this will
likely be contingent upon further global economic recovery. Analyst coverage of this stock is
not very meaningful with only five offering their opinion. Those that are covering the stock
underestimated earnings by huge margins during the first part of this recovery, and only got it
right during the most recent quarter. A strong case could be made that a lack of coverage
and understanding of this company's potential and position is to blame for why the stock is
trading at half of what it should be. Going by extremely conservative estimates that mirror the
first two quarters of this year and do not allow for further margin improvements, the stock is
trading at just 7 times this years earnings, and just 6 times 2011 earnings.

What about the possibility of further economic instability or a so called double dip recession,
we all saw how hard this company was hit in 2008? Well, these fears seem to be subsiding
day by day now, and regardless, the company is in a much better position now. The
restructuring they completed during the rough times has shown clear improvements to
operating margins that go beyond the typical enhancements seen due only to increased
production. Every possible number is now better than during the good times of 2006-07,
except the stock price. The stock did climb from 50 cents to where it is now in 2009, which
may be another key reason behind the current pause.

Removing accounts payable and receivable, which are at $84 and $129 million respectively,
the balance sheet reflects $400 million in assets and $50 million in liabilities, a ration of 8 to
1. Over the past year, short term debt has shrank from $18 to $5 million (or perhaps 0 now)
and long term debt has dropped from $73 million to $20 million, all while their cash position
remained relatively unchanged at around $75 million. The $30-40 million in quarterly cash
flow they are currently generating can now be used to grow revenues, margins, and cash
position rather than paying off debt. Shares outstanding have not changed significantly for
the past decade, there are no preferred shares issued, and with even less of a need now,
dilution seems to be completely off the table. Short interest is not very significant at less than
5%, but institutional ownership at 86% is. Arbitrary lack of involvement from institutions in
stocks below $5 and $10 is just one more superficial reason why this stock is undervalued.
If substance wins and the company continues to deliver, the stock may have no where else to
go but up.

iltering for Value and Growth: Entegris

eptember 3

, 2010

Staff