Bull of the Day: MKS Instrument (MKSI) - Bull of the Day

Profit margins soared in the quarter thanks to favorable product mix and operating leverage. This prompted analysts to revise their estimates significantly higher for both this year and next, sending the stock to a Zacks Rank #1 (Strong Buy).

MKS Instruments develops products that measure, control, power and monitor critical parameters of advanced manufacturing processes. The company's primary end markets are manufacturers of capital equipment for semiconductor devices, and for other thin film applications including flat panel displays, solar cells and light emitting diodes (LEDs), data storage media and other advanced coatings.

MKS Instruments reports its results in four segments:

Advanced Manufacturing Capital Equipment: (64% of gross revenue year-to-date)
Asia Region Sales & Service Operations: (25%)
Analytical Solutions Group: (6%)
Europe Region Sales & Service Operations: (5%)

Second Quarter Results

MKS Instruments reported better-than-expected second quarter results on July 23. Adjusted earnings per share came in at 42 cents, crushing the Zacks Consensus Estimate by 50%. It was 200% higher than the same quarter last year.

Sales rose 18% year-over-year to $185 million, beating the consensus of $172 million. This was driven by 21% growth in the 'Advanced Manufacturing Capital Equipment' segment due in part to stronger-than-expected demand in the semiconductor market.

Profit margins expanded greatly due to favorable product mix and operating leverage. The company's gross margin in Q2 expanded from 39.5% to 43.4%, and its adjusted operating margin jumped from 6.6% to 17.6%.

Estimates Rising

Following strong Q2 results, analysts revised their estimates significantly higher for both 2014 and 2015. This sent the stock to a Zacks Rank #1 (Strong Buy).

The 2014 Zacks Consensus Estimate is now $1.71, up from $1.45 before the report. The 2015 consensus is currently $1.96, up from $1.73 over the same period.

Valuation

Shares of MKSI are up about 6% since the Q2 report. The stock's price to cash flow ratio of 19x is above both its historical median and the peer group. However, its price to 12-month forward earnings ratio of 18 is essentially in-line with its 10-year historical median and below the industry median of 20.

The Bottom Line

With expanding profit margins, rising earnings estimates and solid growth projections, MKS Instruments still offers investors attractive upside potential.

Todd Bunton, CFA is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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