Vishay Intertechnology: Incremental Capacity Continuing To Rise (NYSE:VSH)

Intro

We wrote about Vishay Intertechnology, Inc. (NYSE:VSH) (Semiconductor & Electronic Component Manufacturer) in November 2020 & February 2021 when we rated the stock a ‘Buy’ on both occasions. Although gains come in at roughly 2% since our latter article, the total return of the stock has come in at approximately 28%+ since our November 2020 commentary. Suffice it to say, this 28%+ return for investors who decided to hold through this period is still a sizable opportunity cost when compared to the comparable return of the S&P 500.

Although, we remain long-term bullish on Vishay, the stock’s underperformance in recent years demonstrates that timing a long entry in this play remains of strict importance. Therefore, given the technicals we discuss below, we are downgrading our ‘Buy’ rating to a ‘Hold’ for the time being.

If we go initially to Vishay’s Intermediate technical chart, we like the fact that shares look oversold from a MACD perspective. However, what we would be looking for here would be an intermediate golden cross (crossing over of the stock’s 10-week moving average above its 40-week counterpart) followed by a move by the MACD indicator to positive territory. The MACD is especially noteworthy on longer-term charts due to the amount of information that goes into the readings along with the dual-role (momentum & trend) functionality of the indicator.

Despite the stock’s oversold conditions, what investors need to be mindful of here is that history repeats itself many times in stocks & financial markets in general. Remember, through these charts, what we are trying to ascertain is long-term investor psychology which in the main does not change. As outlined on the chart below, shares of Vishay Intertechnology stagnated for well over 12 months from mid-2021 to late 2022 before a sizable rally out of consolidation was recorded. Therefore, to ensure we avoid a prolonged period of potential choppy sideway action, it would be prudent on our part to wait for the above-mentioned intermediate buy signals to present themselves to protect our purchasing power over time.

If we go to the 12-month chart of Vishay, the bullish volume trends in recent months lead us to believe that a potential bearish descending triangle is not playing itself out here. If one looks closely at volume trends, it can be seen that buying volume on rallies is greater than selling volumes on descents. This essentially means that there are more buyers than sellers in the stock at the $22 to $23 level & that downside support should hold at least for the time being.

Keen Valuation

Revenues fell by 3% in fiscal 2023, and operating profit declined by over 20%. Guidance & associated revisions trends are not that encouraging either for fiscal 2024 with earnings of $1.28 being the current bottom-line figure on full-year revenues of $3.09 billion. However, despite the expected 47%+ drop in bottom-line earnings in fiscal 2024, we see above that shares have been able to hold support since November of last year.

All the while, shareholder equity (2.196 billion at the end of fiscal 2023) continues to grow and the float (125+ million shares) continues to come down. Management between the dividend and share buybacks managed to return $134.3 million to shareholders in fiscal 2023 with a further $100+ million for this present fiscal year. Suffice it to say, that despite the current negative growth environment, Vishay as an investment continues to become more attractive with total shareholder returns remaining impressive in a down-cycle.

Growing equity & a reducing share count have positive ramifications for the company’s valuation. As we see below, Vishay remains undervalued with the company’s trailing book & forward cash-flow multiples particularly attractive in the current environment. Furthermore, given how management has kept debt in check and how cheap Vishay’s assets have become, we see a rise to the stock’s 2023 highs ($29+) once an intermediate technical bottom is confirmed in earnest.

Click to enlarge

Strong Return On Equity

Despite the negative growth metrics mentioned earlier, Vishay’s trailing return on equity tops 15%. Therefore, with shareholder equity continuing to rise on the balance sheet, it should only be a matter of time before positive earnings growth returns to Vishay. Furthermore, a further ROE tailwind should materialize over time through the sustained investment in Vishay’s fastest-growing & highest-margin lines. Management continues to execute in this area by doubling down on investments in Sustainability, E-mobility & Connectivity and by remaining close to the customer resulting in being able to anticipate their needs. Therefore, the key is for the stock’s forward-looking revisions to stabilize somewhat over the upcoming months. This will ensure healthy cash-flow levels which will enable shareholder equity to keep growing over time.

Demand Led Investment Continuing

Management continues to increase capacities as outlined by the CEO’s comments on the Q4 earnings call in early February. It will be interesting to see if the first quarter of fiscal 2024 provided more momentum concerning Vishay’s expansion projects. Furthermore, bulls will be hoping that the inherent value in the company’s updated diodes, resistors, inductors & transistors will be quickly snapped upon by end markets through a solution-based approach. Moreover, it should be pointed out here that due to the recent transaction resulting in lower net leverage as well as the almost $1 billion of cash & equivalents on the balance sheet, there is no obvious reason why this scale of investment & near-term initiatives cannot continue.

Just some of the company’s ongoing expansion initiatives include new diode qualifications in Taiwan & Italy. Furthermore, an increase in the volume of inductors & the ramping up of the qualification of automotive-derived solutions is also underway in Mexico. Mosfet capacity is also being ramped up by employing a new semiconductor fabrication plant in Germany. These latest endeavors all come on the back of the announcement in late 2023 of the acquisition of the wafer fabrication facility in Wales. Management announced recently that is $177 million purchase has now been completed.

Conclusion

To sum up, although Vishay shares trade with a keen valuation where forward-looking fundamentals remain bullish, we deem the stock a ‘Hold’ at present until an intermediate bottom at least is confirmed in the technicals. Investors need to remain patient here while this bottoming pattern plays itself out. We look forward to continued coverage.