Full Speed Ahead for Taiwan Semi

01/20/2012 11:16 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

One of the best plays on recovering global chip demand has soared to longtime highs in a bullish tell, writes MoneyShow.com senior editor Igor Greenwald.

It was only six weeks ago that Texas Instruments (TXN) issued a sales warning heard around the world, citing “broadly lower demand across a wide range of markets, customers, and products.” Its stock bottomed ten days later below $28 a share.

And all it’s done over the last month is surge 20%, aided by the 8% spike Wednesday. Of course, a lot of trash has been treated like treasure lately.

But semiconductors aren’t like that. Their recent rise is based on unequivocally upbeat commentary from companies that saw no upside just six weeks ago. The steep inventory correction precipitated by fears of a global recession seems to have run its course. And of course the news has spurred a rush of short-covering and speculative buying that some are now suggesting has overshot its mark.

Here’s what’s lathered up the bulls:

  • Late Tuesday, analog integrated circuits maker Linear Technology (LTCC) predicted an unexpectedly large sequential sales boost, with the CEO claiming “an inflection point in our business.” Orders strengthened during December and into January, he said.

  • The next evening, programmable IC developer Xilinx (XLNX) reinforced the message by beating estimates.

  • Also Wednesday, chip equipment supplier ASML Holdings (ASML) beat estimated and predicted healthy demand for its lithography machines from makers of logic and flash memory chips.

  • Last but not least, leading contract chip maker Taiwan Semiconductor Manufacturing (TSM) projected flat sequential revenue instead of the typical seasonal dip, a tentative sign of improving demand among its hard-hit customers.

Taiwan Semi’s shares have spoken much loudly than its circumspect CEO by breaking out to the highest level in nearly a decade. As a leading foundry with technology its rivals simply haven’t matched, TSM is especially leveraged to the prospect of accelerating global demand.

And it’s particularly well-placed to profit from booming Asian demand for smartphones and tablets, which require ever more powerful yet energy-efficient circuits. One of the questions on this week’s conference call concerned how TSM will wield its pricing power in the absence of competitive alternatives to some of its technology.

The stock looks even more attractive in the wake of the recent victory in Taiwan’s presidential election by mainland China’s preferred candidate, promising political stability and closer economic integration. As Beijing shifts from an export-driven growth model to one based on internal demand, consumer electronics sales should continue to boom to Taiwan Semi’s ultimate benefit.

In the meantime, TSM offers a 3% yield and a 25% return on equity.

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