Taiwan Semi: A Tech Bargain

02/23/2016 10:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Our latest featured recommend was founded in 1987 in Taiwan; it is one of the largest manufacturers of advanced semiconductors, explains J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

Taiwan Semiconductor Manufacturing (TSM) employs 43,000 workers—mostly in Taiwan—and generates sales of $27 billion.

The current shortage of semiconductors is prompting customers to increase orders. Sales increased 10% and EPS rose 12% in 2015.

Sales of microchips used in mobile devices, including new 20 nanometer (20 billionths of a meter) microprocessors, contributed much of the growth.

Sales will likely increase 4% and EPS will climb 5% to $1.86 in 2016. Sales and earnings could exceed my forecasts.

Demand for lower-priced smartphones in China is showing signs of recovery. Also, strong demand for next-generation mobile devices will require its advanced technology and manufacturing capabilities.

The introduction of new mobile devices is expected to create stronger desire for the company’s technology during the next several quarters.

To meet demand, the company will raise capital expenditure by at least 10% from 2015’s four-year low.

Taiwan Semiconductor’s balance sheet is solid and the company’s dividend, paid annually, provides an attractive 3.2% yield. TSM is a bargain at 12.0 times latest EPS.

The stock price will likely rise 40% and reach my minimum sell price target of $31.08 within two years. Buy at $22.15 or below.

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