In April, I wrote about Swiss-based semiconductor products manufacturer STMicroelectronics NV (STM, Financial). The share price then was $37.80. It popped in May, June and again this past week to near $40 per share. The stock closed above $36 mid-week.
Outside forces
Pullbacks seem to coincide with news about the latest pandemic lockdowns in China, fears that American consumer spending is slowing and continuing chip supply chain shortages. With limited production in the semiconductor business, the demand for STMicroelectronics' products is pent up.
It is only a matter of time until external barriers fall away. As such, I am confident about sticking to my previous position that there is significant upside potential for growth in semiconductor stocks.
About the company
STMicroelectronics designs, develops, manufactures and markets commodity components and integrated circuits for analog, digital and mixed-signal applications. Its semiconductor products are popular with manufacturers of screens that rotate and have texture-mapping capabilities. Its high-voltage op amp device adds flexibility and precision for power supplies and in automotive applications, including self-driving vehicles.
The company has a worldwide network for wafer fabrication, assembly, testing and packaging plants. Principal wafer fabrication facilities are in Italy, France and Singapore. Assembly and test facilities are in China, Malaysia, Malta, Morocco, the Philippines and Singapore.
Valuation
The stock has a GF value $43.80 based on historical ratios, past financial performance and analysts' projections of future earnings. As such, it is modestly undervalued currently.
Futher, its GF Score of 90 out of 100 indicates the company has high outperformance potential moving forward. STMicroelectronics' profitablity, growth and financial strength received high marks of 8 out of 10 from GuruFocus, while its GF Value and momentum also fared well with ratings of 7 out of 10.
Based on these considerations, I believe the stock will outperform in the next 12 months, hitting an average price target of $55, conditions allowing.
Financials
There is a lot of positivity in the investment community for the stock. STMicroelectronics reported its second-quarter financial results in July, beating estimates across the board. Earnings per share of 92 cents topped expectations by 12 cents. Revenue of $3.84 billion surpassed projections by $145.3 million and grew 28% year over year. It generated net income of $867 million, yielding healthy gross margin of 47.4% and operating margin of 26.2%.
For the first six months of the fiscal year, revenue increased almost 23% year over year from all product groups.
During the earnings call, management provided positive fiscal year guidance. They expect revenue between $15.9 billion and $16.2 billion, which is up from previous expectations of $14.8 billion to $15.3 billion. Management does not expect any erosion in the gross margin, but operating margins might be lower from inflationary costs and supply shortages.
Return on equity is 30.17% and asset growth for the trailing 12 months is 11.35%.
STMicroelectronics has shaved debt over the past year from $3.17 billion to $2.50 billion. It holds almost $3.5 billion in cash and equivalents. Lower debt, cash holdings and a market cap of $34.55 billion overwhelm any concerns about its liabilities one might have.
Other strengths
Several other factors bolster my view of the stock.
In addition to mostly positive media coverage, holdings among hedge funds were steady from May 2021 through the first quarter of 2022. During the three months ended March 31, the number of guru buys surpassed the number of sells.
Another factor is the positive outlook for the industry. Though there are only a handful of manufacturers, Deloitte forecasts a robust next few years for the chip industry. The insights provider says it will rise to $600 billion, about 10%, in 2022.
Further, the CEO of Intel Corp. (INTC, Financial), Pat Gelsinger, wrote a guest post for Time claiming society stands at “the precipice of the digital age… [and] semiconductors are the brains accelerating this digital revolution. These tiny chips power… the world we want to live in tomorrow.”
I foresee this relatively undervalued stock as an opportunity for retail value investors to be a part of this revolution and make some profits while doing so.
A pesky drawback
One drawback to consider is the paltry dividend yield of 0.67%. STMicroelectronics get low marks for not increasing the dividend in growth, profitability and strong momentum years. The yield is well below the sector average of 0.94%. The dividend has not increased through the last two solid growth years the company experienced.
Final thoughts
STMicroelectronics' financials, research and development and product receptivity are reassuring to this investor. The chip industry is essential to every other manufacturing sector, from appliances to transportation and high-tech devices.
If retail value investors can ignore the minuscule dividend yield, I believe there is a light in the attic that will reveal the serious potential for profits from the company.
