Cyclical Recovery & Ramp Of New Fabs Earn MKS Instruments Rating Upgrade Post Upbeat Q4

Benchmark analyst Mark Miller upgraded MKS Instruments Inc MKSI from Hold to Buy with a $125 price target.
MKS posted upside results with record sales for its December quarter.
However, ransomware incident could negatively impact sales by at least $200 million in 1Q23.
A recovery from the incident is likely in 2Q23. However, headwinds are seen this year due to lower cyclical WFE spending and the U.S. restrictions on semi-equipment sales into China.
An expected cyclical upswing in 2024, combined with the ramp of new fabs and funding by the U.S., Europe, and Japan for internal chip production, is seen lifting non-GAAP earnings to $8.01 per share.
MKS' 4Q22 non-GAAP earnings of $2.00 per share were $0.66 above investor expectations, while sales of $1.09 billion were $95 million above investor expectations.
The December results include a full quarter from the Atotech acquisition.
Sales to semiconductor customers totaled $503 million, up 1.6% Y/Y but down 6.1% Q/Q.
Electronics & Packaging posted sales of $266 million, up 264% Y/Y and up 60.2% Q/Q, while Specialty Industrial sales of $316 million represented a Y/Y increase of 61.2% and Q/Q of 24.9%.
Driven by AP and inspection applications, Photonics Solution sales were at record levels in 2022.
Flexible PCB sales remain muted, but the HDI/Via Drill segment reported some orders.
Packaging accounted for 25% of Electronics & Packaging’ total revenues.
Lower auto production and the impact of COVID in China are affecting the Specialty Industrial segment.
For 2022, MKS reported record semiconductor sales of $2.04 billion. Electronics & Packaging sales of $1.1 billion were up 3% Y/Y, neglecting foreign exchange and palladium pass-through.
Specialty Industrial sales of $1.3 billion were up 4% Y/Y, neglecting foreign exchange and palladium pass-through.
Non-GAAP gross margins of 45.9% were up 100 bps Q/Q but down 50 bps Y/Y.
December quarter Product margins were 45.0%, while Service margins were 42.5% versus the Product margins of 39.8% and Service margins of 48.7% reported in 3Q22.
Mix and lower supply costs positively impacted margins in 4Q22.
Price Action: MKSI shares traded lower by 2.17% at $94.83 on the last check Wednesday.

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