Vishay Intertechnology (NYSE:VSH), a manufacturer of discrete semiconductors and passive electronic components, is dealing with challenges on several fronts. VSH is in a downturn due to a drop in demand that has adversely affected quarterly earnings. The stock itself is down, YTD and for the past 12 months, and there is reason to believe it could trend lower. However, if the recent Investor Presentation held on June 20 is any indication, VSH is confident it can overcome these challenges, and it remains upbeat about the future. Why will be covered next.
Why the bottom may not yet be in for VSH
A past article from May 2023 rated VSH a hold for several reasons, even though the stock was in the midst of an uptrend at that time. For instance, Q1 FY2023 results and Q2 FY2023 guidance were much better than expected, but there was reason to believe VSH was destined for a decline in sales and profits. Furthermore, while the better-than-expected results had powered the stock higher, the charts suggested the stock was getting closer to resistance. This could make further advances difficult, and it might even push the stock lower.
More than a year has passed and the above conclusions proved to be essentially on point. VSH has seen the top and the bottom line shrink after the Q2 FY2023 numbers turned out to be the peak in this cycle. While the stock did manage to move higher initially, the stock is no longer heading higher, and it is instead way below where it was when the aforementioned article was written.
The stock closed at $22.09 on June 27, which means the VSH has lost 7.8% YTD and 22.5% in the last 12 months. Nonetheless, the decline has slowed down significantly, but the bottom may not yet be in. Note how if the recent lows and the highs are connected by trendlines as shown in the chart, both trendlines are going down as a result of lower lows and lower highs. The 52-weeks low was $20.83 and it came on April 19, but the current trend suggests a new low is a possibility.
Furthermore, the decline in the stock following the July 2023 high of $30.10 could be assumed to be a retracement of the prior move up in the stock. This move up saw the stock go from a low of $16.73 in July 2022 to a high of $30.10 in July 2023. The 61.8% Fibonacci retracement of $16.73 to $30.10 is $21.84, which means the stock has been able to breach this line of support.
However, the stock has not breached the next Fibonacci level, which is the 76.4% Fibonacci retracement of $16.73 to $30.10 or $19.89. This may suggest the stock could potentially head lower to the 76.4% Fibonacci level after stopping somewhere halfway between the two Fibonacci levels, especially if the recent trend of lower lows remains. Keep in mind, the most recent low was $20.83 in April 2024, which replaced the February 2024 low of $20.93.
The latter in turn replaced the November 2023 low of $21.15. There is a pattern to be spotted here. The stock seems to be pointing in the direction of lower prices, which could take VSH to the 76.4% Fibonacci level, since that is where support may be found. This would take the stock about 5% below the current 52-weeks lows.
What could be a good entry point for VSH?
If the stock trends lower, makes it to the 76.4% Fibonacci level and support does not hold, then VSH could be going for a complete or 100% retracement of the prior move. This would take the stock back to $16.73, or where the preceding uptrend started in July 2022. This could be a level where speculators may want to dip their toes into the water.
In addition, it is worth mentioning that the stock would be close to trading at book value at $16.73, which is another potential reason to go long. VSH has a book value of $2,187,228K or $2,187.2M with total assets of $4,264,064K and total liabilities of $2,076,836K. If net income was $30.92M and EPS was $0.22 in the most recent or Q1 FY2024 report, then this means the number of outstanding shares is about 140.56M.
This results in a book value of $15.56 per share for VSH. Keep in mind VSH is a profitable company, which has grown at a CAGR of 3-4% in the last five years, so the stock is unlikely to trade below book value. Paying book value or something close to book value is not too much to ask for a company like VSH.
Why shorts are betting VSH goes down
The above could help explain why shorts seem to believe lower stock prices are in the pipeline. According to recent data, short interest rose to 11,750K shares on 6/16/2024, which means 9.5% of the share float is being shorted. This would take 10.1 days to cover, which is the highest it’s been in over two years. In comparison, short float was 5.1% a year ago on 6/15/2023 and before the stock went on its current decline. This points to lots of negative sentiment directed towards VSH.
Shorts are likely to take inspiration from the fact that VSH has fallen into a downturn. Revenue, for instance, has declined YoY for three consecutive quarters. Earnings have been affected as well with GAAP EPS declining YoY in four consecutive quarters. VSH earned $0.22 and $1.74 TTM, which gives VSH a GAAP P/E ratio of 12.7x with the stock at $22.09. The table below show the numbers for the last report or Q1 FY2024.
(Unit: $1000, except for EPS, margins and shares) |
|||||
(GAAP) |
Q1 FY2024 |
Q4 FY2023 |
Q1 FY2023 |
QoQ |
YoY |
Revenue |
746,279 |
785,236 |
871,046 |
(4.96%) |
(14.32%) |
Gross margin |
22.8% |
25.6% |
32.0% |
(280bps) |
(920bps) |
Operating margin |
5.7% |
9.9% |
18.2% |
(420bps) |
(1250bps) |
Operating income |
42,671 |
77,830 |
158,568 |
(45.17%) |
(73.09%) |
Net income (attributable to VSH) |
30,924 |
51,472 |
111,781 |
(39..92%) |
(72.34%) |
EPS |
0.22 |
0.37 |
0.79 |
(40.54%) |
(72.15%) |
(Non-GAAP) |
|||||
Adjusted EBITDA margin |
12.2% |
16.3% |
22.9% |
(410bps) |
(1070bps) |
Adjusted EBITDA |
91,232 |
127,627 |
199,254 |
(28.52%) |
(54.21%) |
Source: VSH Form 8-K
Guidance calls for the streak to continue with Q2 FY2024 revenue of $730-770M, a decline of 15.9% YoY at the midpoint. It’s also up slightly QoQ, but this is because Q2 FY2024 will be the first quarter with full contributions from the recent acquisition of the Newport fab, a cash transaction valued at $177M. Gross margin is expected to decrease once again. Using these guidelines, along with expected charges due to integrating the Newport fab, GAAP EPS is estimated to come in at about $0.16.
Q2 FY2024 (guidance) |
Q2 FY2023 |
YoY (midpoint) |
|
Revenue |
$730-770M |
$892.1M |
(15.93%) |
Gross margin |
21.2-22.2% |
28.9% |
(720bps) |
Source: VSH Form 8-K
The Newport acquisition is why cash, cash equivalents and short-term investments on the balance sheet fell to $833.96M at the end of Q1 FY2024, down from $1,008.53M in the preceding Q4 FY2023, and almost completely offset by $819.31M of long-term debt.
Shorts may also take note of book-to-bill remaining below one. VSH can still count on a substantial backlog, which should limit the impact of weak orders on quarterly results, but that won’t last if book-to-bill remains below one. From the Q1 earnings call:
“At quarter end, book-to-bill for Vishay was 0.82% comprised of 0.73% for semis and 0.91% for passes. Backlog for total Vishay was 5.0 months compared to 5.3 months at the end of the prior quarter. Looking at the backlog quarter-over-quarter comparison by product category. Backlog for semis was 5.0 months compared to 5.3 months and backlog for passives was 5.1 months compared to 5.4 months.”
Source: VSH earnings call
What the latest Investor Presentation had to say
VSH held its most recent Investor Presentation in June 2024 and if this presentation is a guide, then VSH appears to be confident the current challenges will be overcome in time. For instance, revenue growth is expected to accelerate. Revenue grew at a CAGR of 3.6% from FY2018 to FY2023, but this is expected to increase to a CAGR of 9-11% in the next five years or FY2023-2028.
If we then take the midpoint or a CAGR of 10%, then this would imply FY2028 revenue of about $5.48B since revenue in the base year or FY2023 was $3.4B. The latest financial model is also targeting gross margin of 31-33% and operating margin of 19-21%, which are much higher than the 22.8% and 5.7% VSH achieved in the most recent report.
An operating margin of 20% in FY2028 would result in operating income of about $1.1B with revenue of $5.48B. If net margin is 1-2% less or slightly below operating margin, then FY2028 net income could be around $1B. The number of outstanding shares is 140.56M with net income of $30.92M and EPS of $0.22 in the latest report, as mentioned earlier.
Divide net income of $1B by the number of outstanding shares and you get net income of $7.11 per share. Apply a P/E multiple of 13.9x, the average for the last five years, and you wind up with a stock price of $98.83. This suggests the stock could more than quadruple in value four years from now, assuming of course VSH hits its targets and growth accelerates in FY2023-2028.
Investor takeaways
There is a reason why there is a major increase in the number of shares sold short. VSH is dealing with several challenges, including weak demand, which, for instance, had led to a book-to-bill well below one. There are exceptions like the defense market that are doing better, but overall demand remains in a slump. VSH might get some relief in the second half of the year due to seasonality, but it is clear business is not good right now.
The charts also favor the shorts at this time. The current trend of lower lows and lower highs in the charts suggest the stock has room to go lower, something it has done for almost a whole year since the stock peaked in July 2023. Quarterly results went down not long afterwards and the stock seems to have taken its cue from this.
However, while shorting has delivered for almost a whole year as a result of the decline in the stock price, shorts may want to take note of the latest Investor Presentation. Revenue is seen to grow faster than before at a CAGR of 9-11% in FY2023-2028, despite the current challenges facing VSH, which, if achieved, could propel the stock price much higher than where it is now, potentially as high as 4-5 times in four years.
Keep in mind, this is contingent on VSH hitting its targets, which includes growing several times faster in the next five years than it did the preceding five years. Still, the fact that VSH went out to acquire the Newport fab to increase production capacity, in spite of current weak demand, does suggest VSH is confident in the targets laid out.
I do not think shorting is worth it after the stock has already declined by as much as it has in the past year or so and most of the low hanging fruits are likely gone at this point. The downturn in demand remains, but it has already lasted a year, which raises the probability VSH might be due for a rebound, especially if seasonality later in the year is stronger than expected.
I am therefore neutral on VSH. If anything, long VSH might be worth considering if the stock gets closer to book value. Remember that the stock got close to it as recently as two years ago in mid-2022, so it could happen again. This has yet to happen though and with orders and thus demand in a slump, there is not enough to warrant making a move at this time.
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