Category: Columns

$ENTG buying $CCMP: Frankly a bit disappointed

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In my original post on Entegris stock, I mentioned “there actually is a second player as well I am reviewing, but haven’t gotten fully comfortable yet.” That player was CMC materials, or $CCMP. I have followed CCMP for many years but it was run somewhat like a “public” private equity fund. Unfortunately, those rarely work out unless you are a titan in Omaha.

CCMP had wood treatment businesses (which they are exiting), electronic chemical businesses, and then bought a business that reduces drag in oil and gas pipelines. There didn’t seem to be much overlap.

That said, I did think the semiconductor tailwinds would lift CCMP and it was optically cheaper than Entegris stock. I didn’t pull the trigger though and now CCMP is getting acquired for ~17.5x (historically traded around 10-11x) and it’s about a 35% premium. ENTG buying CCMP for $133/share in cash and 0.4506 ENTG shares, or ~$197.50/share total consideration (vs. $146/share the day before announcement). And even outside of this M&A take-out, I have been wrong to not pull the trigger on the name.

Entegris says this will complete their product offering, diversify them a bit, but offer a better package to their customers. It will help them reach their customers in more ways as architectures change, become more complex and manufacturers need to increase yield. It may also help them innovate to meet these challenges.

So why am I disappointed?

From my understanding, the etching and slurry chemicals, as well as the pads, that CCMP sells are much less complex and more competitive. The “secret sauce” isn’t that secret. DuPont is the competition here. So sure, the rising tide might lift all boats, but does Entegris actually need this?

In fact, it actually made me wonder if I am missing something in Entegris. Entegris previously tried to tie-up with Versum, but the the deal was shot down and Versum was taken out by Merck (which was odd too). Why is Entegris “desperate” to do a deal?

Let me be clear – this is paranoia on my front. Entegris has executed phenomenally, but file it under “things that make you go hmmmm.”


To sum it up, I have Entegris doing a deal that seems dilutive from a technology perspective and I have CCMP that was buying and O&G pipeline chemical business just a few years ago and now they are tying up??

Even the answer on the call left much to be desired:

ENTG commenting on CCMP acquisition rationale

I’m staying long $ENTG and think this is a positive, multi-decade story. That said – I understand why Entegris stock is down ~5.5% at the time of writing! The company will also be 4x levered at deal close. They should sell some of the non-core assets within CCMP, but we will see. Whenever a company gets above 3.5x leverage in public markets, volatility follows. As readers know, I love good company / bad balance sheet set-ups. So we shall see!

Interesting Opportunity in “Series i bonds” – Government Rates Greater than 7%

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The WSJ wrote back in May 2021 of the “The Safe, High-Return Trade Hiding in Plain Sight“, which discussed Series I bonds.

Series I bonds are 30-year US treasury bonds that earns fixed interest with an adjustment to the rate to account for inflation (changes in CPI-U, semi-annually). However, they differ from TIPS in many ways. They are not marketable, they have a limit of $10,000 per person per calendar year, and taxes are due at maturity vs. on an ongoing basis. Oh, and Series I bonds interest rates cannot go below zero, unlike for TIPS. You have to buy them on an ancient looking website, though I will say the security guards looked up-to-date.

However, one issue for Series I bonds is the rate can go down if inflation cools. Right now, the “fixed” portion of interest is literally zero. So the interest is 100% made up of the inflation measures in CPI. So if CPI goes to 0%, there is potential the rate is 0%.

And if you redeem within the first 5 years, you lose the last 3 months of interest. So if you are like me, and think inflation statistics will move lower over time, then the rate you earn in a couple years may not be satisfactory.

At the time of writing, the WSJ wrote:

However, now the Series I bonds rate is much higher:

So if you held for 1 year, now the rate you’d earn would be more like 5.34%. Yes, that is “the catch”. But that is for a US government security! Literally no default risk. By comparison, look at the median corporate bond yields from 1 year+

In addition, while you can only invest $10,000 per person per year, we’re close to the end of the year, so I can stuff an extra $10,000 in there early next year. And my wife can do it. Kids can do it.


Normally I don’t think I’d write much about an “opportunity” like this but it definitely is interesting. If you’re one that thinks inflation will spin out of control, you probably are in some other “hedge” investment, but I like this as a modest hedge (though I will likely cash out early).

Personally, while I want to say I can constantly find equities that will beat this hurdle, it doesn’t seem terrible to me to have some portion of the portfolio in these I bonds. This certainly beats my cost of debt threshold on my mortgage!

Earnings Check-in: $STRT Some things you think are priced-in…. are not

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Strattec just reported FQ1’22 with sales of $100MM vs. $126MM PY and basically break-even on the net income line vs. $8MM PY. The stock is down ~7% on the news.

I am a bit surprised this wouldn’t be priced in more pre-earnings, but I get it: it is a microcap and actually seeing the poor results may be stark realization of what is going on.

As I mentioned in my first post,  as well as American Axle, investors are stepping out of the way of any of these names due to the semiconductor shortage that is causing auto OEMs to shutdown plants temporarily.

Here’s the company’s reasoning for the results and it is obvious:

Sales to Stellantis / Fiat Chrysler Automobiles (FCA) and General Motors Company in the current year quarter decreased over the same period in the prior year quarter due primarily to lower vehicle production volumes for which we supply components due to the continuing impact of the global semiconductor chip shortage.  Sales to the Ford Motor Company in the current quarter increased primarily due to the increased content on the F-150 pick-up truck for which we supply components. Tier 1 Customers and Commercial and Other OEM Customers were down in the current year quarter compared to the prior year quarter due to lower production vehicle volumes relating to the semiconductor chip shortage referenced above

Short-term, results will be ugly! Long-term, this bodes well for an elongated up cycle.

The reason why used car prices continue to make new highs is simply because people can’t get new cars. As new cars are continuously delayed, the existing fleet will continue to age, resulting in a large restocking cycle down the road of new cars. It isn’t that people don’t want cars – it is that they can’t get them. I’d much rather have that alternative than the latter.

Case in point, check out Lithia Motors inventory numbers lately and look how limited new vehicle inventory is (and used for that matter). They typically have 77 days supply of new cars, but instead now just have 24 days! 

Long-run, I still think Strattec stock is going for <3.5x normalized EBITDA, which is not too bad!

Earnings Check-in: Don’t Miss the Forest for the Trees $LGIH

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I last did a “don’t miss the forest for the trees” post on Big Lots. That company went on to rally from when I posted it (not because of me, but because the reaction was way too negative). Unfortunately, supply chain concerns have created new pressures on BIG. In a similar vein, supply concerns are now pressuring LGIH stock, but I remain unfazed and take comfort in the long-term story.

LGIH just posted September home closings were 793 vs. 811 last year, which is a miss for a company “growth” company and I believe this is below expectations. They didn’t report earnings, but investors closely watch these reports for signals of how the quarter will shape up.

We’ve seen other builders also lower their guidance already:

  • Pulte (PHM) lowered closings 6%
  • DR Horton (DHI) lowered closings 9%, but raised GM target, so net / net EPS impact was margins
  • Lennar (LEN) lowered closings 5%
  • KB Homes missed closings by 7%
  • Hovnanian just lowered guidance for closings and lowered EBITDA expectations (see yellow line below).

So clearly the homebuilders are all aligned here.

But you need to understand why they are all guiding down: tight supply. To me, this firms the thesis.

LGIH is a largely spec builder at really attractive price points. While they are selling lots very quickly and now need to reinvest, I am comfortable that this model will continue to do very well in the long run. Absorptions are still running at 7.7 (compared to average pace of 6.5) so again, this isn’t really a demand issue, but more so a supply problem. I like it when demand outstrips supply.

Interest rates have also increased modestly, so can’t help but think that is pressuring the stock. That could have a severe impact on the price, but again, I’d likely be unfazed given the long-run story here.

At ~8x forward PE and 2x TBV, I also think valuation is undemanding (DHI trades at 1.6x TBV).

Earnings Check-in: ABM Stock Performance is Perplexing $ABM

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This update will be brief, but I wanted to highlight that ABM recently reported last week, following its M&A announcement that I covered in this note.

When I first wrote about ABM stock, I said (i) guidance was way too low, and I expect a lift in guidance across the board (ii) there’s upside optionality from doing a large acquisition and (iii) the stock is cheap.

If you had told me that ABM would go on to raise EPS guidance TWICE and announce an $830MM accretive-day-one deal, yet ABM stock would be little changed, I’d be SHOCKED. The stock is actually down about 6% since I wrote about it…

When ABM reported, they increased EPS guide now to $3.5 at mid-point. This is now at the high range of the previously stated EPS guide.

Not to brag, but this is exactly where I thought it should be, which you can see in the original table I posted:


Why the Muted Reaction?

I struggle to believe this was “priced in” to ABM stock when I first wrote about it, I just think sustainability of earnings is being questioned.  However, management actually noted the current high margin environment will likely persist for even longer than I thought:

Overall, demand for ABM’s higher-margin virus protection services remained elevated in the quarter, underscoring ongoing client concerns regarding cleaning and disinfection of their facilities. As anticipated, demand for virus protection eased slightly in the third quarter compared to the second quarter of fiscal 2021, but remained well above pre-pandemic levels. The emergence of the Delta variant and rising COVID-19 cases nationally have gained heightened interest in the need for disinfection prevention measures, particularly in high-traffic areas. As we look forward to 2022 and beyond, we believe that virus protection services will remain a contributor to our overall revenue as disinfection becomes a standard service protocol in facility maintenance programs

….So I think it’s still hard for us to pin down a formal long-term margin. We’re looking forward to giving you full year guidance in the next 3 months, and then that will give you the insight for the next year. But look, we’re going to say what we’ve continued to say throughout, which is the 2 areas for elevated margins are in disinfecting and labor arbitrage. And we believe we will permanently keep portions of that. As we restaff these buildings, we believe we’re going to be able to do it more efficiently, and we’ll capture some savings. Again, it’s still too early to figure out how much.

And then the disinfecting, we see like maybe 2 quarters ago, there was — or maybe even a quarter ago, there was no Delta variant, right? So like I think this is going to continue to evolve. And we’ve all just said it even anecdotally. It’s just… I don’t think facility managers or landlords or principals of schools, I don’t think anyone thinks it’s responsible to discontinue disinfection services, especially in high-touch areas. So that’s going to continue, too. So we believe we will continue to be elevated, but give us until next quarter when we do full year guidance to kind of give you that year outlook.


So again, I go back to the original pitch. I’m not necessarily expecting this work to last forever, but here’s what ABM will do (and basically already did):

  • they’ll generate a ton of FCF (about 11% of market cap by my math)
  • they will use cash first to pay down debt from the Able acquisition
  • Once they are in a comfortable range, they’ll buy something else
  • Rinse & Repeat

This is what compounders do, it’s just a bit frustrating when this compounder gets no love.


I think the pushback is that margins likely will go down in the future – but what does it matter if earnings DOLLARS are higher? (They buy something else, there are some structural changes in the business, aviation and education segments are roaring back at higher margins which is happening, etc.)

The point of this slide to me is not that ABM is some dividend stock, but that it does a pretty good job compounding earnings.