3 Factors For Credit Suisse's Bullish Rating On Versum Materials

Credit Suisse initiated coverage of Versum Materials Inc VSM with an Outperform rating and $27 target price on the sustainability of the current margin profile, ability to pursue accretive M&A and strong technology.

Versum is a mid-cap specialty chemicals company comprising the Electronics Materials segment of Air Products & Chemicals, Inc. APD.

The key piece of Credit Suisse's bullish thesis is margins, which the company strengthened by business divestitures (photovoltaic), improvements in product mix, and a shift of a large portion of its production from the US to select locations in Asia.

Analyst Kieran de Brun noted that Versum's technology strategically integrates its platform with customers to benefit from secular growth trends in the semiconductor industry (3-D NAND, logic and memory growth, etc.).

Brun expects margins to be 34.4 percent in 2016 and believes margins are sustainable around mid-30 percent as the company's technology is getting it new contracts.

Further, the analyst said the company's strong free cash flow and balance sheet should pave way for accretive M&As.

"Given strong FCF generation (Credit Suisse estimates ~$184mm in 2016), we expect VSM will have plenty of dry powder to pursue bolt-on acquisitions (to expand product offerings) and potentially larger M&A deals, which could include equity components," Brun wrote in a note.

As such, Brun believes Versum's industry-leading margins and strong growth opportunities outweigh the risks of a high degree of leverage, potential economic downturn and volatility in raw material prices.