I would like to bring investors attention to ATMI (ATMI), a small cap growth company which I believe is not being valued properly based upon their true potential. ATMI is primarily known as a microelectronics company, however they have two exciting high growth divisions which are on the cusp of turning profitable, enabling the company to grow at a much higher growth rate, while potentially doubling their earnings per share over the next two to three year period.. By year end 2014, I believe ATMI could appreciate 20%, while longer term I believe the stock has the potential to double in price.
In my experience, companies like this, where divisions fall under the radar, have provided great long term investment opportunities. In addition, ATMI does not seem to have a strong following in the investment community, and in the research reports I have read there does not seem to be much focus on the company's major growth drivers, its emerging new businesses.
Over the past two years, ATMI's growth has been choppy, with top line revenues bouncing from 390 million in 2011, to 407 million in 2012 and expected revenues of 405 million in 2013.I see 2014 as a point of inflection for ATMI's topline revenue growth. ATMI has been incubating two extremely exciting high growth businesses, and I believe the value of these businesses will be realized over the next two years. In addition, ATMI has stated they are seeking strategic alternatives for the company, which I believe could result in a spinoff of one of their divisions, or the implementation of a major stock buyback. Either of these announcements could act as a catalyst for the stock to move higher.
THE COMPANY: Three divisions.
ATMI is comprised of three divisions. The largest division is the Microelectronics business, which makes up roughly 87% of the company's revenues and all of its operating profits. The growth in this division has been lackluster, but gross margins have been a respectable 30%. The second division is the LifeScience division, which has been growing its revenues at a 20 to 30% rate is in just now moving from an operating loss position, to an operating profit position. Management believes this business can grow their topline revenues by 20% to 30% in 2014, and generate operating margins in the mid-teens over time. ATMI's third division is eVOLV. I believe that eVOLV has the largest upside of the three divisions, with a business model that is based upon recurring royalties and high license start-up fees. eVOLV is a company that has a patented precious metal recovery technology, which management claims is more efficient, less costly than existing technologies, and can be run to generate zero waste. ATMI has just recently signed two major licensee partners, and will be generating its first income from both license fees and royalties over the next three months. With both eVOLV and LifeScience turning the corner on profitability, and with the small turnaround in microelectronics, I believe ATMI could double its current stock price by 2015. In addition, ATMI is working on several other wildcard initiatives, including a new CO2 capture system. Although the CO2 product is in early development stage, it could be a contributor to earnings 4-5 years out.
Just as a final point, on November 1st, 2013 management issued a press release stating they are exploring strategic alternatives for the company. When I talked with management, they were unable to comment on this release, but did mention that the strategic alternatives being considered include potential internal restructuring options. From this comment and my understanding of the growth drivers in the company, I believe that the company may be thinking of spinning off its LifeScience division. Management has stated that they believe this division is a $100M business in the next 3 years, and that the business can grow topline revenues at 20%-30% y/y, with 15% operating margins by the end of FY14. Based upon my analysis, I believe this division alone is worth $7 to $10 per share within the next three years. I will discuss below in the valuation segment what this division might be worth. The other strategic alternative which I believe would make a great deal of financial sense would be a major stock buyback. The company currently has over 15% of its market cap in cash, and is on the cusp of increasing that cash balance dramatically as their two growth divisions turn profitable.
The reason a large opportunity exist in ATMI is it has predominately been a semiconductor company with a very small medical and metal recovery division. The inflection points for the two smaller divisions have not been reached as the eVOLV and LifeScience divisions both are not profitable. I have read two analyst recent reports on ATMI and both do not include eVOLV and hardily mention LifeScience. This is common in smaller companies that have multiple independent divisions where many times analysts that follow one industry do not necessarily follow other industries. Also, the majority of institutions that have holdings in ATMI are value oriented (T.Rowe Price Small-Cap Value Fund, Heartland Select Value Fund). Once the inflection points of eVOLV and LifeScience have been realized, investors will focus on the growth potential of all three divisions and not just the value of the microelectronics division.
Divisions
Microelectronics
ATMI has had a history of over 25 years in the microelectronic space, developing semiconductor solutions in which they supply high performance materials, materials packaging, and materials delivery systems for use in the manufacture of microelectronics devices worldwide. The company primarily offers front-end semiconductor performance materials; sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases to semiconductor process equipment. It also focuses on the development of manufacturing processes to meet the critical purity and integrity requirements of the microelectronics manufacturers. ATMI's customers include semiconductor device manufacturers, flat-panel display manufacturers, chemical suppliers and semiconductor OEMs. Primary competitors include Air Products and Chemicals (APD) (Electronics division), DuPont Electronic Technologies (DFT), and Haas Electronic Materials, as well as a number of small companies that specialize in niche markets.
Management stated that the microelectronics business will improve over the next year as growth has been slowed in 2013. S&P indicates the biggest growth catalyst for the industry over the long term is an increase in flash memory spending as well as foundry spending. The Microelectronics division represents on average 88% to 90% of ATMIs revenue. Microelectronics has been a substantial driver of cash for ATMI and will continue moving forward. Management stated they will work diligently to cut costs within this division to improve margins while also funding higher growth initiatives.
eVOLV
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Globally more than 72 million metric tons of e-waste is discarded each year with less than 20% of e-waste being recycled and the majority of e-waste ending up in China, India and other emerging companies. While e-waste is less than 2% of the massive landfills it accounts for 70% of the hazardous materials in those landfills. In addition to the environmental impact e-waste contains large quantities of valuable metals. For example, 6,000 used mobile phones contain 340g of gold, 4kg of silver and 140kg of Copper that has a combined value of $28,000. To capitalize on this market opportunity, ATMI has developed a new technology called eVOLV, based on green chemistry and green engineering methodologies. The eVOLV process from ATMI can extract most metals from the circuit boards at 99% extraction efficiency with greater than 99% purity. The electronic components from the boards can be reused or sold. End-of-life electronics can now be de-processed using cost-effective, sustainable, and scalable methods. Importantly, the eVOLV process is incredibly efficient, safe and environmentally friendly, making it a revolutionary solution for highly regulated e-waste management environments.
The attractive aspect of eVOLV is the revenue stream, which is comprised of both upfront licensing fee and ongoing royalty fees. The licensing fee is an upfront fee to use the technology. Once the partner enters into a deal, they pay the upfront fee that averages between $1M-$2M. From there, ATMI gives the partner the blueprint to make the machine and steers them in the direction of a company that is able to put the machine together. Once the machine is built and running ATMI collects a royalty payment dependent upon the amount of e-waste they save the partner. Normally 5,000 tons of e-waste savings per year generates $3-$5M in royalties to ATMI per partner. Even more significant is that the license fees have 100% operating margins and the royalties have 70-80% operating margins. There are no capital requirements for ATMI outside of staffing an employee at each site to help run and monitor the machine. ATMI has signed two partners thus far and will record $1M for each partner in Q4 2013. ATMI has indicated that they will collect royalties of $3-$5M in revenue per partner, but as these first two partners are the first to use the machine outside of ATMI, they predicted on the conservative side, ,and project that they will collect $3-$5M in total from the two by 2014. A more aggressive view would look for $8M in total from the two.
LifeScience
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ATMI is an acknowledged technology leader in the manufacturing of single-use bioprocess systems and consumables. The upside of disposable bioreactors is that they can easily be operated with process control systems that allow monitoring of important culture parameters like gas flows, temperature, pH, dissolved oxygen levels, and agitation speed. These factors, in addition to growth surface material and shear stress on the cells, can drastically affect the way the cells grow and differentiate. The end of the process, the harvest of the cells represents another challenge. It is also important that the process has been well-documented and can be validated throughout. If this is not the case, any cells cultivated in 2D culture vessels may have critical flaws that could lead to the need for intense revalidation of cell integrity.
ATMI's LifeScience division developed a product called Xpansion which is a bioreactor system to overcome these issues and enable stem cell culture. It is designed based on stacked plates that have been made from the same plastic material as multiple tray stacks. By maintaining a consistent environment for the cells, the process is easily transferable from the multitray-stack into the Xpansion bioreactor. This also helps mitigate regulatory risks.
In the last reported quarter ATMI saw their gross profit margin(GPM) for LifeScience decrease 400BPS Y/Y but guided they will recover 200BPS of that in the current quarter. Management indicated they will see GPM ramp up as they sign new license agreements. ATMI believes this is a $100M business in the next 3-4 years. In addition, once they get their revenue to break even which is $15M/qtr, they will have additional contribution margins of 65%. ATMI plans on being break even this quarter. Management indicated that they will grow 20% to 30% y/y in 2014. ATMI stated last quarter that they are arriving at an inflection point in LifeScience that they have been working towards for over two years.
In simpler terms, the LifeScience division saves companies a significant amount of money compared to other existing technologies.
Valuation
eVOLV: As you can see in my chart below ATMI will record $2M in licensing revenue in Q4 2013 that was from the two partners signed in the last couple quarters bringing them to FY2013 revenue of $2.7M. ATMI has indicated that they will collect royalties of $3-$5M in revenue per partner but as these first two partners are the first to operate the machine outside of ATMI by end of 1H 2014, they predicted on the conservative side, they will collect $3-$5M in total from the two. In my model I provided a bear case of $4M in total royalties, while also assuming they do not receive any new partnership license fees. In my base case I am assuming the $7M in total royalties and one new partnership. In my bull case, I estimate $8M in total royalties and two new partnerships in FY14. Management indicated that margins would be 70% to 80%, implying the operating income line will be $8M. If they sign additional partners in 2014 the contribution could drive much greater upside to this division, and driving much higher eps for ATMI. My FY 2015 estimate assumes the two older partnerships will generate $5M each, and that two new partnerships are signed in 2014 and will generate $4M each. In addition, I estimate another 2 partnerships will be signed in 2015, generating $2M in license revenue for ATMI, bringing revenue for eVOLV in 2015 to $20M, with $16M in operating profits. One can see the massive potential for each partnership that ATMI signs. I want to reemphasize that every new partnership will add $0.06 EPS. $1-$2M in start-up license revenue, and $3-$5M in royalties by the end of the year. With an 80% margin and a 35% tax rate, each new partnership has the possibility of generating .06 cents per share in incremental earnings. Competitors that are in the space consist of Sims Metal Management on the Australian Stock Exchange that trades at 20X NTM eps and Commerical Metals Company (CMC) that trades at 16X NTM eps. The reason ATMIs multiple could be over 20X is the amount of debt the two competitors have and the lower growth rate compared to eVOLV.
LifeScience: Management indicated that Q4 2013 revenue growth would be flat. Management stated they expect 20% to 30% revenue growth y/y in 2014. 2014 operating margin as discussed before will be 8%-10%. Management also implied that operating margins will expand to ~15% in 2015. For my bear case I used a 15% y/y growth rate with 6% op margins, for my base case I used 8% op margins on revenue growth of 20% y/y. Finally, for my bull case I used 30% y/y revenue growth and 10% margins. My 2015 estimate assumes 25% y/y growth from my 2014 base case and the 15% margins management indicated for 2015. This would bring me to 2016 revenue to hit the $100M revenue goal management stated 3 years out. I believe the Life Science division could be a spin-off candidate by the end of FY14. When looking at my operating line for LifeScience, for 2015 I have $11.3in operating profits. If I apply a 20X multiple, I get a potential market cap of $226M for this division, or $7 per share (based on the existing 32 million shares outstanding). Competitors in this space consist of Bruker Corporation (BRKR) 16X NTM eps, Pall Corporation (PLL) 13X NTM eps, and PerkinElmer (PKI) 13X NTM eps. The reason I apply a 20X multiple for ATMI's LifeScience division is because the other competitors are much bigger and have slower projected growth than ATMIs division. Also, BRKR & PKI have debt whereas ATMI is cash positive.
Microelectronics: Q4 2014 Microelectronics will be flat, although management stated 2014 will improve. My bear case assumes 2% y/y growth with 25% operating margins. My base case assumes 4% y/y growth and 27% operating margins. Finally my bull case assumes 5% y/y growth with 30% operating margins. My 2015 estimates assume 5% growth y/y from my 2014 base case and operating margins of 30%. Two of the competitors are Entegris (ENTG) that trades at 20X NTM eps and Brooks Automation (BRKS) that trades at 24X NTM eps.
New Initiatives & Expenses: The New Initiatives & Expenses category includes corporate expenses, revenues and expenses associated with early stage new market opportunities such as their eVOLV™ and BrightBlack® technologies. Management stated that this will increase slowly as they grow the top line and expense other products. BrightBlack is a specialty material that can be engineered to adsorb a variety of different gases, producing a highly-selective adsorbent for applications such as safe gas uptake and storage, alternative fuels and greenhouse gas capture. ATMI is working with SRI International where under the agreement, ATMI will lead commercialization efforts and is engaging potential development partners for rapid scale-up and commercial deployment of CO2 capture systems. Although this technology venture will be a source of near term expense, it could be a potential big driver for both top line and bottom line in the future.
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Pro Forma Income Statement: In chart 2, I summarized my results from each business segment based on my conservative case versus my more aggressive case. In my call with management they indicated that they have been repurchasing stock and will continue in the future as well as investing internally. ATMI currently has $138M in cash and no debt, with 32.4M shares outstanding. For 2014 I assumed they have 1 million less shares and a tax rate of 35% bringing me to a conservative FY2014 target of $1.73. Applying a 20X multiple gets me a PT of $35 (curr. at $29). In my aggressive 2014E I have a PT of $40. For 2015, I projected an additional $1M shares repurchased and a similar 35% growth rate. Applying a similar multiple to FY2015 derives a target of $54, an 86% increase from the current price of the stock. Revenue growth y/y in 2014 will be 4.4% or 7.8% and 10.7% in 2015. To note, I will refer to my conservative case in my sensitivity analysis and investment thesis. The aggressive case can be used to see the potential upside. I do believe it is possible for the aggressive numbers to be hit. If ATMI management decides to embark upon an aggressive stock buyback plan where they buy back 15% of stock over course of 2014, this would raise my conservative case from $1.73 to $1.94 and my bull case would go from $2.03 to $2.29. Given the investment alternatives for their cash, I believe management would view investing in their own business as one of the best alternatives they have. The absolute bottom to the downside for my 2014 estimate is if the microelectronics and LifeScience divisions do not grow. In addition, the eVOLV technology does not generate royalties for ATMI and no new partnerships are signed. This floor case would derive a downside of $24 a 17% risk. Applying competitors comparable multiples as highlighted in the prior section gives me great conviction that a 20X multiple is fair for ATMI when the growth rates and cash position are compared.
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Sensitivity Analysis: In addition to my pro forma projections I have provided in the third chart below a sensitivity analysis for 2014. The left column are the different EBIT margins and top row are the different revenue growths y/y. My estimate range is highlighted in the red indicating the pro forma income statement above. In addition I have highlighted in blue what the current street estimates are. As one can see the discrepancy between my estimates and the street is that they have not recognized the potential growth and margins of eVOLV and LifeScience. Applying a 20X multiple to the streets $1.55 FY14 EPS gets me an absolute bottom of $31 or a 7% increase from the current price.
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DCF: My DCF analysis takes the PV of FCF from 2013 to 2017. The equity value of 1,091.2 with 31.4M shares outstanding implies a per share value of $34.75(highlighted in red). ATMI is currently trading at a 20% discount to my DCF assumptions assuming an EBITDA multiple of 9.5X to 10X. The importance of the DCF model is to understand the true intrinsic value of ATMI when all the opportunities are discounted back.
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DuPont Analysis: I also performed a 5 Step DuPont analysis with my projections to see what the potential return on equity will be. By 2014 ATMI should see double digit return on equity of 10% a 250 basis point improvement from 2013. In addition 2015 will be 14.5% which is an additional 450 basis point improvement from 2014. The importance of this evaluation is to see the potential ROE ATMI could provide to their share holders. The growth since 2011 of (4.4%) to potentially 14.5% in 2015 is substantial and provides even more vindication that ATMI is highly undervalued.
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Investment Thesis:
ATMI provides a rare opportunity to capitalize on an undervalued stock that has the possibility to grow its earnings by over 100% over the next two years. Every new partnership in eVOLV will grow EPS by $0.06. The market for eVOLV is massive and the recurring royalty aspect is very attractive. eVOLV has no incremental costs outside of employee costs for ATMI and provides them $3-$5M in royalties per partner. In addition, the LifeScience division will double three years from FY13 growing at ~25% per year. I believe a possible spin-off of the LifeScience division is just icing on the cake and provides additional upside if it does happen. In closing, management indicated to me that they have a long history within the semiconductor space and will continue to apply their technology in new areas to dramatically grow the business. To sum my valuations up, my DCF gets me a PT of $35, my base pro forma 2014 gets me a PT of $35 as well, while my bull case is $40. Finally, my pro forma 2015 implies a PT of $54. The absolute downside to my 2014 estimate is $24. Although the chance of this scenario happening is slim to none, it provides an idea of the downside risk for 2014.
NTM Catalyst:
- Earnings growing faster than analysts expect
- Potential stock buyback
- Restructuring of company, announcing a spinoff or sale of their LifeScience division
- Strong growth in LifeScience and new partners signed in eVOLV
- ATMIs ability to turn around the microelectronics business
NTM Risk:
- Ability to effectively promote their technology and get new partners
- The response of their existing partners to efficiently and quickly use the technology for improved results as well as continue using the technology for years into the future
- As they roll out eVOLV the results of their large scale facility don't match the results of the small scale facility.
Disclosure: I am long ATMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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