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Forum List » Value Ideas and Strategies Share and discuss value investing ideas and investing strategies.  
Shares of Taiwan Semiconductor Manufacturing Offering Safety and Growth
Posted by: Yiannis Mostrous
(IP Logged)
Date: August 15, 2012 11:23AM
As so-called defensive stocks become more expensive, now’s the time to consider “cyclicals” such as Taiwan Semiconductor Manufacturing (TSM).
Taiwan Semiconductor reported on July 19 second-quarter 2012 revenues of USD4.2 billion, an increase of 21 percent quarter over quarter, an impressive performance considering uncertain global economic conditions. Demand for Taiwan Semiconductor’s advanced 28nm chip is expected to remain strong for the rest of 2012, to support smartphone launches. Nonetheless, the company’s broader business is likely to experience a late-year inventory correction, as its supply chain adjusts to the weak macro outlook. Cycles in the semiconductor industry have become shorter and more seasonal than ever before. Taiwan Semiconductor’s management estimates that production cuts that began in early June should run their course by the end of August. That said, the end of the year and the beginning of 2013 will see a slowdown, as demand for mature products bottoms and the supply chain gears up for new products. Taiwan Semiconductor’s innovative technologies have given it leadership in mobile phones and a growing share of the broad-based industrial sector. Many investors don’t fully appreciate the contribution the industrial sector is starting to make to the company’s bottom line. Taiwan Semiconductor’s industrial business has expanded from 10 percent to 22 percent of sales, on market share gains made in microcontrollers, touch integrated circuits, analog/power management and programmable logic. These products enjoy longer product cycles and stable margins. Taiwan Semiconductor continues to heavily invest in research and development, to keep up with such fierce competitors as Intel (INTC). Taiwan Semiconductor’s 2012 capital expenditures reached about USD8.5 billion, on the high end but still not enough to create overcapacity. As company chairman Dr. Morris Chang commented: “TSMC invests in capacity for future growth, with the company revenue growing at an average 20 percent CAGR from 1997 to 2007 while foundry grew at 16 percent during the same time period.” The company has also focused on developing its existing technologies, with its 28nm chip yielding better than originally planned. Management has also explicitly said that Taiwan Semiconductor is now benchmarking the performance of its chips to those of manufacturing leader Intel rather than other foundries, a big step that indicates Taiwan Semiconductor is getting ready to raise its game and seek global dominance. Taiwan Semiconductor also announced for the first time that its 16nm “FinFET” chip will be produced in volume in 2015. The chip will provide 25 percent to 30 percent power reduction at the same speed/standby power versus its 20nm. For mobile products, it allows 15 percent to 20 percent speed gains at the same power consumption. Meanwhile, the company’s balance sheet is strong enough to support the capital needed for growth. Cash increased in the second quarter to USD7.2 billion. Net of debt, cash now stands at USD5 billion. The company’s exposure to communications (50 percent of sales) will be a big positive for the rest of the year. Moreover, the company’s sheer size provides investors with a defensive component during this period of overall market vulnerability. The stock is trading at attractive valuations, with a 3.5 percent dividend yield, making it a dividend investment worth looking at.
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