Speciality Chemical Play: Versum Materials, Inc.
- Versum is a specialty chemical company involved the semiconductor industry.
- Versum is strategically positioned in the semiconductor supply chain with its two operating segments.
- This company is in the middle of a secular growth story and is supported with good fundamentals and stock is still pretty cheap.
The semiconductor industry (aka the chip industry) is an industry that is in a secular growth trend on many fronts. The emergence of the “Internet of Things”(IoT) from cars to household appliances is one of the fronts that has driven the demand of chips as the world moves to be a connected to the internet constantly. This increased demand of chips is a boost for specialty chemical companies that are a part of the semiconductor industry supply chain. Versum Materials, Inc (VSM) is a company that is well positioned to grow from the secular growth trend in the semiconductor industry.
Versum Materials is a manufacturer of specialty gases and chemicals exclusively for the semiconductor industry. The company was spun off from Air Products and Chemicals, Inc. (APD) in October 2016 to unlock value for APD shareholders. Versum has two operating segments which are the Materials segment and the Delivery Systems & Services (DS&S). The Materials segment which deals with mainly the specialty chemicals for semiconductor supply chain has revenue growth of around 7% and is the larger of two segments. The DS&S segment that deals with developing and transporting specialty gas for semiconductor companies is the faster growing segment at 70% revenue growth but is still small in terms revenue (generating $70 million/quarter). Versum is strategically located around world with operations in the United States, Taiwan, South Korea and Europe. Given how Versum Materials is still a new company, management is going to make a lot M&A moves in consolidating their position in specialty chemical market for the semiconductor industry.
Management has started making moves with their M&A strategy and they announced a deal two months ago. Versum acquired Dynaloy, LLC from the Eastman Chemical Company (EMN) for $13 million. Dynaloy is a leading supplier of formulated cleaning solutions for the semiconductor and specialty manufacturing industries. This acquisition will boost Versum’s market share as well as revenue growth. Versum Materials has a market cap of close to $4 billion (Yahoo Finance), which is still relatively small. The company is growing revenue at around 19.8% and trades at close to 18 times next year’s earnings(which is very very cheap compared to the S&P500 trading at 23x). The company has healthy cash flow and dividend yield of 0.56%($0.20/share). This company might be a way to play the secular growth in the semiconductor industry with demand for chips from smartphones to self-driving. Although the company is a serial acquirer of smaller companies, Versum can be an acquisition target for the newly formed DowDuPont Inc. (DWDP) after it splits itself into three companies. Versum Materials is a perfect fit for the Materials Science division which will be a standalone company after the split.
Versum’s stock has been on fire in 2017 and is up over 30% and I still think the stock is still a buy under $40 with the amount of growth and position in the semiconductor space. I am definitely a buyer of the stock on any market correction or pullback.
Disclosure: Cresco Investments is long Versum Materials (VSM).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor.