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FPA Capital Comments on MKS Instruments

MKS Instruments (NASDAQ:MKSI) is a leading provider of systems to measure, power, and control critical parameters of advanced manufacturing processes. About half of their business focuses on semiconductors and the other half focuses on advanced markets (e.g., advanced manufacturing processes in industrial markets, life/health sciences, etc.).

We like the business because MKSI's end-markets have long-term entrenched demand drivers, which we believe should lead to mid-single-digit growth over-the-cycle. Additionally, MKSI's strong management team has delivered better than industry growth11 through a combination of accretive acquisitions and market share capture. Furthermore, MKSI is a leader across most of its key products and we view their market position as entrenched within the semi cap supply chain.

Following a disappointing 1Q19 earnings report, where investors were surprised by the negative results of the recently acquired Electro Scientific acquisition, the stock took its first leg down. The stock continued its downward slide as trade war fears flared up and this presented an opportunity to continue building out the Fund's position.

Our view is that we are a few quarters into a down cycle and this tends to be a good time to purchase cyclically depressed stocks. Additionally, we believe the management has a track record of astute capital allocation and we expect more of the same from them whether through bolt- on acquisitions or buybacks. Finally, we think the street is not attaching an appropriate multiple to the firm's non-semi business and there could be an opportunity for a multiple re-rating as the market sees the stability that other businesses provide.

From FPA Capital Fund (Trades, Portfolio)'s seocnd quarter 2019 commentary.
This article first appeared on GuruFocus.