A Tech Giant at a Deep Discount

12/04/2008 10:21 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says Taiwan Semiconductor is changing hands at its cheapest price in years.

If there’s a silver lining in this year’s global market meltdown, it’s that many “best of breed” companies are trading at their lowest levels in recent memory. Companies and sectors that once belonged exclusively to the domain of growth investors have become fair game for bargain hunters.

Taiwan Semiconductor Manufacturing (NYSE: TSM) belongs on anyone’s short list of Asia’s greatest technology success stories. Based near Taipei in Hsinchu Science Park, Taiwan Semiconductor is the world’s largest independent semiconductor foundry, with revenue of $9.7 billion in fiscal 2007, and a current market capitalization of $33.5 billion.

The company produces state-of-the-art chips on a contract basis for customers including AMD (NYSE: AMD), Broadcom (Nasdaq: BRCM), and Qualcomm (Nasdaq: QCOM). But two decades ago, the company didn’t even exist.

Back then, Taiwan was better known for cheap, low-quality electronics than cutting-edge semiconductor technology. Eager to shed that old stereotype, Taiwan’s technology ministry tapped Dr. Morris Chang, an MIT-educated veteran of Texas Instruments (NYSE: TXN), to help build Asia’s answer to Silicon Valley. In 1987, Chang formed Taiwan Semiconductor with the backing of the government and Philips Electronics (NYSE: PHG), the Dutch conglomerate.

In the ensuing ten years, Taiwan Semiconductor developed into an industry leader with a global reputation for manufacturing excellence. After listing its shares on the New York Stock Exchange in October 1997 at a split-adjusted price of $5.28, TSM surged as high as $21 during the tech bubble. At a recent $6.50, TSM is now less than $2.00 above its split-adjusted initial public offering price, and in line with levels last seen in the dark days of 2002.

Of course, there are plenty of risks. Consensus analyst forecasts call for TSM to earn 40 cents per ADR in 2009, a nearly 40% plunge from this year’s earnings levels. And estimates may be slashed even further. (Shares were hit after the company cut earnings forecasts for the first time in seven years—Editor.)

But this time around, TSM offers something that it didn’t have in previous downturns: a fat dividend yield. TSM yields north of 6%, [and it] has the financial strength to back it up.

TSM had total debt of less than $12 million on September 30th, compared with cash and equivalents of more than $200 million. That works out to roughly 25 cents per share of net cash. In the third quarter, TSM had free cash flow of $1.4 billion. That will almost certainly shrink in the coming quarters, but there should still be ample cash coming in the door to cover the dividend.

In a credit crunch, a strong balance sheet also becomes a huge competitive advantage. Semiconductors are a capital-intensive business, and companies that can afford to ride out the slump will likely emerge much stronger. And thanks to the dividend yield, you can get paid to wait it out along with them.

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