These two under-the-radar semiconductor-service companies could give your portfolio a boost.
The semiconductor sector, which is responsible for producing the advanced computer chips that power our favorite electronics, is large and complex. Most investors are familiar with industry darlings like Nvidia or Advanced Micro Devices, but there’s an entire subfield of companies providing critical products and services to the world’s top chipmakers.
Some of them are trading at very attractive market valuations as they tend to receive less attention than their more glamorous peers, and that’s an opportunity for investors.
It’s possible you’ve never heard of Ultra Clean Holdings ( UCTT 0.92% ) or MKS Instruments ( MKSI 0.41% ), but they’re fast-growing and highly profitable, and those aren’t the only reasons to add them to your portfolio right now.Â
The case for Ultra Clean Holdings
Ultra Clean is based in California, and has been in business for over 30 years. The company is conscious of the rapid growth in demand for semiconductors triggered by the onset of advanced technologies like electric vehicles, smart homes, and the 5G network. It provides a range of products and services to make the chip manufacturing process more efficient, which is increasingly important as semiconductors become more complex.
For example, the company’s ChemTrace solution identifies contamination risks in fabrication clean rooms, to help chipmakers maintain a high yield with less waste. And its QuantumClean processes prolong the life of production equipment, with fast service turnarounds to reduce potential downtime.Â
Ultra Clean’s mechatronics segment also focuses on unlocking precision in the manufacturing process, carefully testing robots, assemblies, and systems to ensure requirements are being met for the given purpose. Automated production processes need to operate at high speeds while maintaining pinpoint accuracy, so this analysis can prevent costly issues once manufacturing goes live.
The company is on an impressive growth streak at the moment, on both the sales side and profitability side, recovering from a loss in 2019 to deliver positive earnings per share.
Analysts expect further strength in 2022, with $2.5 billion in revenue and $4.9 in earnings per share in the cards. Yet Ultra Clean stock trades at a price-to-earnings multiple of just 12, which is a 47% discount to its peers in the industry represented by the iShares Semiconductor ETF, which trades at a multiple of 23.
It implies Ultra Clean stock would need to almost double just to trade in line with the broader sector, and if it continues this run of performance, it just might.Â
The case for MKS Instruments
MKS Instruments is another service company with a multidecade history — this time spanning over 60 years. It not only serves the semiconductor industry, but it also has a robust portfolio of customers in industrial technology, health science, and defense. The company describes itself as the go-to critical-problem-solving partner for advanced manufacturers.
Given the company’s broad solutions, it says virtually every semiconductor chip is made with MKS products. As chips become smaller yet more powerful, producing them is growing more complex, and MKS supports manufacturers with solutions in all four phases of the chip production process. One of the challenges for chip makers is maintaining production yield while also boosting productivity, as new chemistries in advanced semiconductors require process innovations.Â
MKS offers multiple tools to solve these new-age problems, including infrared optical sensors, plasma sources, and process monitoring. The goal is to reduce waste, save cost, and ultimately increase output.
The company has generated strong financial results recently, but its soaring earnings per share is of particular note. It’s partly attributable to a continued increase in gross profit margin from 45.2% in 2020 to 46.8% in 2021.
Analysts predict further full-year growth during 2022 in both sales and earnings, albeit at a slowing rate — no company can near-double its profits every year forever. However, investors get the benefit of a $0.22 quarterly dividend, so MKS will pay you a return of approximately 0.75% per year to hold its stock. That’s better than money in the bank in most cases.
MKS Instruments stock trades at a price-to-earnings multiple of 11, which is even cheaper than Ultra Clean Holdings, so there’s a similar case for significant upside in order for MKS to trade in line with the broader semiconductor sector.Â
