BUSINESS
Materion Corporation, through with its subsidiaries, produces advanced engineered materials used in semiconductor, industrial, aerospace and defense, automotive, energy, consumer electronics, and telecom and data center in the United States, Asia, Europe, and internationally. It operates through Performance Alloys and Composites, Advanced Materials, and Precision Optics segments. The Performance Alloys and Composites segment offers advanced engineered solutions comprising beryllium and non-beryllium containing alloy systems and custom engineered parts in strip, bulk, rod, plate, bar, tube, and other customized shapes. This segment operates the bertrandite ore mine and refinery located in Utah that provides feedstock hydroxide for its beryllium businesses and external sale.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, MTRN is expected to continue to be an important Value Builder.
Materion has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Materion has a slightly negative Appreciation Score of 39 but a good Power Rating of 73, producing the Neutral Value Trend Rating.
Materion’s stock is selling at targeted value. The current stock price of $126.75 compares to targeted value 12 months forward of $131.
This moderately low appreciation potential results in an appreciation score of 39 (61% of the universe has greater appreciation potential.)
Materion has a Power Rating of 73. (MTRN’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 27% of companies in the universe.)
Contributing to this good Power Rating: recent price action has been favorable. Offsetting factors are the Primary Smelt, Refining Nonferrous Metals comparison group is currently in an unfavorable position; and the trend in MTRN’s earnings estimates has been unfavorable in recent months.
INVESTMENT PROFILE
Materion’s financial strength is below average. Financial strength rating is 40.
Relative to the S&P 500 Composite, Materion Corp has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that MTRN is normal risk. Low historical profitability is a relative weakness for Materion. Materion’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. MTRN has unusually low market capitalization.
CURRENT SIGNALS
Materion’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; and rising leverage.
Materion’s current technical position is very strong. The stock price is in a 4.0 month up move. The stock has appreciated 45.6% from its prior low. The stock price is above its 200 day moving average which is in an uptrend. The stock has just risen above its 200 day moving average.
ALERTS
Significant positive changes in investment behavior have recently occurred for Materion Corp (NYSE: MTRN): the stock’s recent price rise disrupted its longer term downtrend.
. Positive developments: significant quarterly earnings acceleration occurred, and the stock’s power rating rose above 70. Negative developments: significant quarterly sales deceleration occurred, and the consensus estimate for December, 2024 decreased significantly.
The stock is currently rated C.
Materion Corp (NYSE: MTRN) stock increased 1.3% on 4/9/24. The shares closed at $126.75. However, trading volume in this advance was unusually low at 60% of normal. The stock has been exceptionally strong relative to the market over the last nine months and has risen 1.0% during the last week.
CASH FLOW
In 2023, Materion experienced no change in cash of +$0.2 million (+1%). Sources of cash balanced uses. Cash generated from 2023 EBITDA totaled +$205.2 million. Non-operating uses consumed -$8.5 million (-4% of EBITDA). Cash taxes consumed -$20.2 million (-10% of EBITDA). Re-investment in the business amounted to -$117.7 million (-57% of EBITDA). On a net basis, debt investors withdrew -$47.9 million (-23% of EBITDA) while equity investors received -$10.6 million (-5% of EBITDA).
Materion’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Materion Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, Materion was in the third quartile and top quartile. Currently, Materion is slightly below median at -4% of EBITDA (-$8.5 million).
Materion’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Materion Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Materion was in the top quartile. Currently, Materion is at the upper quartile at -10% of EBITDA (-$20.2 million).
Materion’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Materion Peer Group. In most years, Materion was in the second quartile and third quartile. Currently, Materion is below median at -57% of EBITDA (-$117.7 million).
Materion’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Materion Peer Group. In most years, Materion was in the top quartile and third quartile. Currently, Materion is slightly above median at -23% of EBITDA (-$47.9 million).
Materion’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Materion Peer Group. In most years, Materion was in the top quartile and second quartile. Currently, Materion is slightly below median at -5% of EBITDA (-$10.6 million).
Materion’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Materion Peer Group. (Since 2020 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Materion was in the second quartile and lower quartile. Currently, Materion is lower quartile at +0% of EBITDA (+$0.2 million).
Materion’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Materion Peer Group as well. In most years, Materion was in the lower quartile and third quartile. Currently, Materion is lower quartile at +1%.
PROFITABILITY
Materion’s return on equity has improved very significantly since 2014. The current level of 10.8% is 1.19X the low for the period and is at the high.
A major analytical focus for MTRN is a little change in pretax operating return significantly augmented by a very strong positive trend in non-operating factors.
The productivity of Materion’s assets declined over the full period 2014-2023: asset turnover has suffered a very strong overall downtrend.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Materion’s return on equity is above median (10.8%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is slightly above median (6.1%) reflecting asset turnover that is lower quartile (0.94X) and above median pretax margin (6.5%).
Tax “keep” rate (income tax management) is at the upper quartile (88.8%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at median (1.99X).
GROWTH RATES
There are no significant differences between Materion’s longer term growth and growth in recent years.
Materion’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 5.5% per year.
Total asset growth has been 11.0% per year.
Annual E.P.S. growth has been 16.3% per year. (More recently it has been 55.6%.)
Equity growth has been 7.3% per year.
Materion’s consensus growth rate forecast (average of Wall Street analysts) is 18.5% — substantially above the average of the historical growth measures.
Relative to the Materion Peer Group, Materion’s historical growth measures are consistently second quartile. Revenue growth (5.5%) has been above median. Total asset growth (11.0%) has been above median. E.P.S. growth (16.3%) has been above median. Equity growth (7.3%) has been above median.
In agreement with this pattern, consensus growth forecast (18.5%) is at the upper quartile.
PRICE HISTORY
Over the full time period, Materion’s stock price performance has been variable and quite good. Between June, 2013 and April, 2024, Materion’s stock price rose +368%; relative to the market, this was a +44% gain. Significant price move during the period: 1) May, 2016 – August, 2018: +164%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 20.8% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 20.8% is at median relative to Materion Corp Peer Group.
Current 5-year total return performance of 19.1% is upper quartile relative to the S&P 500 Composite.
Through February, 2024, with upper quartile current 5-year total return of 19.1% relative to S&P 500 Composite, Materion’s total return performance is at the upper quartile relative to Materion Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, MTRN’s overall valuation is normal. The highest factor, the price/earnings ratio, is above median. Ratio of enterprise value/earnings before interest and taxes is slightly above median. Ratio of enterprise value/assets is slightly above median. Price/equity ratio is slightly below median. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
Relative to Materion Peer Group, MTRN’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is at the upper quartile. Price/equity ratio is upper quartile. Ratio of enterprise value/assets is upper quartile. The lowest factor, the price/earnings ratio, is slightly above median.
Materion has a major value gap compared to the median valuation. For MTRN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 1.87X to 0.91X. If MTRN’s ratio of enterprise value/revenue were to fall to 0.91X, its stock price would be lower by $-78 to $49.
For MTRN to fall to lower quartile valuation relative to the Materion Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 1.87X to 0.60X. If MTRN’s ratio of enterprise value/revenue were to fall to 0.60X, its stock price would decline by $-102 from the current level of $127.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, MTRN is expected to continue to be an important Value Builder.
Materion’s current Price Target of $138 represents a +9% change from the current price of $126.75.
This moderately low appreciation potential results in an appreciation score of 39 (61% of the universe has greater appreciation potential.)
Notwithstanding this moderately low Appreciation Score of 39, the high Power Rating of 73 results in an Value Trend Rating of C.
Materion’s current Price Target is $138 (+14% from the 2023 Target of $122 and +9% from the 04/09/24 price of $126.75). This slight rise in the Target is the result of a +11% increase in the equity base and a +3% increase in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a large negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 15.2% — slightly above our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2015 and 2023. The current forecast is well above the 2016 low of 6%.
PTR’s growth forecast is 10.0% — substantially above our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2015 and 2023. The current forecast is significantly above the 2017 low of 0%.
PTR’s cost of equity forecast is 9.5% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2015 and 2023. The current forecast is well above the 2015 low of 3.2%.
At Materion’s current price of $126.75, investors are placing a positive value of $41 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 15.0% per year, and a return on equity of 11.2% versus a cost of equity of 7.8%.
PTR’s 2025 Price Target of $138 is based on these forecasts and reflects an estimated value of existing assets of $97 and a value of future investments of $42.
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