Vishay Intertechnology: A Change In Direction May Be Unavoidable (NYSE:VSH)

Vishay Intertechnology (NYSE:VSH), a leading supplier of discrete semiconductors, is in good position to accomplish what very few semiconductor stocks will be able to in 2022. That is to end the year up with gains. VSH actually spent much of 2022 in negative territory, but a fourth quarter rally changed all of that. In addition, it’s worth noting that the rally proceeded despite downbeat guidance from VSH. However, recent gains notwithstanding, there are still reasons why some may choose to sit out the rally. Why will be covered next.

The stock has rallied, but maybe not for much longer

There is still a month left to go, but it will take a miracle if the semiconductor sector is to avoid ending the year 2022 in the red. For instance, the iShares Semiconductor ETF (SOXX) has lost 30% YTD. In contrast, VSH has appreciated by 5%, with one month left in 2022. The chart below shows how a strong rally in the fourth quarter shook things up for VSH.

The stock was down 19% as recently as the start of the fourth quarter, but it has since gained 30% in value and it is now up 5% YTD for the year. The stock has clearly done much better lately after going sideways basically, but this change in fortunes can be said to have started at the start of the second half of 2022. Note how the stock seems to be in an uptrend in the second half of 2022 with both the highs and the lows trending higher.

An ascending channel can be observed by connecting the highs to form an upper trendline and by connecting the lows to form a lower trendline. The stock has moved between the extremes imposed by these trendlines, and with the channel going up, so too has the stock. The trend is pointing higher, a bullish sign for VSH.

However, the stock is now at the upper boundary of the channel, which suggests the stock is due for a pullback. In fact, this is exactly what the stock proceeded to do on previous occasions. The stock bounced when it came close to support provided by the lower trendline, just as how the stock retreated when it came close to resistance imposed by the upper trendline.

Note how the stock has struggled in recent days to move past the upper trendline despite repeated attempts. It’s possible for the stock to overcome resistance imposed by the upper trendline, but the odds are in favor of a move down rather than a move up, especially with the stock having gained about 30% in the past two months. This is not to say that the stock cannot continue higher, but all the above suggests the stock is due for some sort of pullback in the near term.

The most recent earnings report came in mixed

It’s worth mentioning that the stock continued to rally even though the most recent earnings report came in mixed. In fact, the stock fell 6.5% the day after the latest report. However, the stock recovered and it has since gained another 15%. The stock closed at $23.04 on Friday, which is a 52-week high and the high for 2022.

While Q3 results were above expectations, Q4 guidance fell short of expectations. Q3 revenue increased by 13.7% YoY to $924.8M. GAAP EPS increased by 46.3% YoY to $0.98 and non-GAAP EPS increased by 47.6% YoY to $0.93. Adjusted EBITDA was $223.7M in Q3 FY2022, up from $198.9M in Q2 FY2022 and $161.8M in Q3 FY2021. The top and the bottom line both surpassed expectations and VSH’s own guidance to reach record highs. And if not for forex, the numbers could have been even better. The table below shows the numbers for Q3 FY2022.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2021	QoQ	YoY
Revenue	$924.798M	$863.512M	$813.663M	7.10%	13.66%
Gross margin	31.3%	30.3%	27.7%	100bps	360bps
Operating margin	19.8%	17.5%	15.2%	230bps	460bps
Operating income	$183.103M	$150.823M	$123.521M	21.40%	48.25%
Net income (attributable to VSH)	$140.061M	$112.388M	$96.820M	24.62%	44.66%
EPS	$0.98	$0.78	$0.67	25.64%	46.27%
(Non-GAAP)
Adjusted EBITDA margin	24.2%	23.0%	19.9%	120bps	430bps
Adjusted EBITDA	$223.737M	$198.938M	$161.763M	12.47%	38.31%
Net income (attributable to VSH)	$134.120M	$117.793M	$91.106M	13.86%	47.21%
EPS	$0.93	$0.82	$0.63	13.41%	47.62%

Click to enlarge

Source: VSH Form 8-K

However, there’s more to it. Part of the reason why VSH was able to far surpass its own Q3 guidance, of $860-900M in revenue for instance, was due to an easing of COVID-19 lockdowns in China, which enabled VSH to make up for what was lost in Q2. Remember that lockdowns put some of VSH’s facilities in China out of commission for two months in Q2, which affected the quarterly numbers for that quarter as the affected facilities did not contribute. From the Q3 earnings call:

“In the third quarter, sales, excluding exchange rate impacts, came in substantially above the midpoint of our guidance. This was due to special efforts of our Asian semiconductor plants to make up for the Q2 shutdowns, you will remember. We achieved sales of $925 million versus $864 million in prior quarter and $814 million in prior year. Excluding exchange rate effects, sales in Q3 were up by $76 million or by 9% versus prior quarter and up by $155 million or by 20% versus prior year.”

A transcript of the Q3 FY2022 earnings call can be found here.

If not for distortions in China, the Q3 numbers would likely not have been as nice as reported. Furthermore, the backlog, which had been at record levels, declined from 8.4 months of sales at the end of Q2 to 7.3 months of sales at the end of Q3. This is likely to continue with book-to-bill falling below 1. Book-to-bill was 0.88 in Q3, down from 1.07 in Q2.

The decline in bookings and the backlog suggests the quarterly numbers are probably going to get worse in the coming quarters. VSH’s own outlook suggests as much with guidance calling for Q4 FY2022 revenue of $860-900M, still an increase of 4.4% YoY, but also a decline of 4.8% QoQ at the midpoint.

	Q4 FY2022 (guidance)	Q4 FY2021	YoY (midpoint)
Revenue	$860-900M	$843M	4.39%
Gross margin	29.5-30.5%	27.3%	270bps

Click to enlarge

In comparison, consensus estimates expected significantly higher revenue of $912M, which helps explain why the stock dropped after the Q3 report despite the record-setting and better-than-expected quarterly results. Non-GAAP EPS stood at $2.46 in Q1-Q3 and consensus estimates predict VSH will end with $3.22-3.28 in FY2022, suggesting EPS of $0.76-0.82 in Q4 or $0.11-0.17 less than in the preceding quarter. Consensus estimates predict FY2023 EPS of $2.02-3.20, a decline of roughly 19% YoY.

Why VSH is seeing buying interest

The outlook was less than stellar, but the stock has cast it aside after an initial drop to continue higher. As mentioned earlier, VSH has gained 30% in value since the start of the fourth quarter and 15% after the release of the Q3 report. This report included record-setting sales and profits, but also included downbeat guidance.

There are a couple of factors that seemed to have played a role in making this possible. For starters, the rally in the stock has coincided with a rally in the stock market. The stock market has rallied since early October, which has pulled semis along, VSH included. For instance, the SPDR S&P 500 Trust ETF (SPY) has gained 14% since the start of the fourth quarter.

This change did not come about for no reason. Stocks have gained in recent months as a result of increased expectations of a Fed pivot. Inflation, for instance, was lower than expected, raising the possibility that the Fed will be able to slow down the pace of interest rate hikes that have weighed on stocks, tech stocks, in particular. This has led to a repositioning in stocks in anticipation of a change in Fed policy. Stocks have benefited accordingly.

It also helps that valuations for VSH are on the low side. For instance, VSH has an enterprise value of $2.93B, which is equal to 3.7 times EBITDA on a forward basis and 3.9 times EBITDA on a trailing basis. In comparison, the median for the sector is 13x and 13.8x, respectively. The table below shows some of the multiples VSH trades at.

	VSH
Market cap	$3.27B
Enterprise value	$2.93B
Revenue (“ttm”)	$3,485.2M
EBITDA	$760.5M
Trailing GAAP P/E	8.51
Forward GAAP P/E	7.05
PEG ratio	0.27
P/S	0.95
P/B	1.72
EV/sales	0.84
Trailing EV/EBITDA	3.86
Forward EV/EBITDA	3.66

Click to enlarge

Source: Seeking Alpha

Investor takeaways

I am neutral on VSH as stated in a previous article. There are a number of arguments to be made in favor of long VSH. While the charts suggest a pullback is likely in the short term, the trend still points to higher prices, pullbacks notwithstanding, as it has since the start of the second half of 2022. Trends can change, but at the moment, they argue in favor of long VSH.

Multiples are on the low side, which is sure to appeal at a time when investors are looking to get back into stocks in anticipation of a more accommodating Federal Reserve. The stock has outperformed after all, being up for the year at a time when most semis are not. No one should be faulted for thinking long VSH is the way to go with all the above in play.

However, the market may have prematurely assumed a change in monetary policy is near. The last inflation report was indeed better than expected, but it was just one report. It’s too early to assume inflation has passed and the Fed has room for less tightening. If inflation turns out to be more persistent and Fed policy has to remain tight for longer, stocks could easily give back what they gained due to assumptions made about monetary policy.

If this happens, attention could switch to issues that have been overlooked during the stock market rally. VSH posted record sales and profits in Q3, but guidance was disappointing. The backlog and bookings declined and, if this continues, a continued decline in the top and the bottom line may not be far away. The market has cast aside these unwelcome developments with the market focused on macro issues, but if it turns out the market was overly optimistic as to a Fed pivot, the market could very well come to the realization that VSH is not in that solid a position.

Bottom line, VSH has done very well, especially in the last two months, but there is reason to believe the stock is due for a pullback. There is also reason to believe the fourth quarter rally was driven by perhaps overly optimistic assumptions about a change in Fed policy, which overshadowed the outlook that suggests the quarterly numbers are headed for a decline. Put the above together and sitting out the rally makes absolute sense.