TSEM - Tower Semiconductor Ltd. Is Making A Comeback

2024-01-08 15:10:26 ET

Summary

• Tower Semiconductor's stock price is not keeping pace with other chip foundry companies due to factors including the impact of the ME war and disappointment in a failed buyout.
• Tower Semiconductor is seen as a potential opportunity for retail value investors with patience and risk tolerance.
• Tower Semiconductor specializes in analog semiconductor solutions and has the potential for growth as demand for analog chips increases.

Trotting Not Sprinting

We join the small chorus of Seeking Alpha, Wall Street analysts, and the Seeking Alpha Quant Rating who see Israel-based Tower Semiconductor Ltd. ( TSEM ) as a potential Buy opportunity for retail value investors. Patience and some risk tolerance are necessary. We expect the share price to hover around $29 each through the next several quarters. The chip industry is awash in an oversupply of inventories and the global economic GDP is in a deceleration mode for now.

Tower's share price ticked up along with the stock market after the pandemic subsided. In 2021 through April '22, the share price popped on news of negotiations for a buyout from Intel Corp ( INTL ). Intel canceled , the industry remained in crisis mode longer than most anticipated, and share prices of Israel-based companies dived in October 2023 after Black Sabbath. The combination drove down Tower's share price from a 57-week high of $48 to ~$22 around October 10, '23.

The shares are climbing again, closing at $29.47 the other day. We think conditions will keep the share price near there for a couple of quarters. The price can move up perhaps 10% to 12% or higher in mid-year 2024 if industry conditions and the economy create more demand for chips. Moreover, Israel-based stocks have been jumping as war conditions settle and reservists are released to return to work. Other emerging data support our position:

• Appliances, smartphones, cars, and other durable goods depending on semiconductor chips are getting cheaper, which will spur consumer spending .
• The World Fab Forecast is for semiconductor capacity to grow by 6.4% this year. 2024 will see a rise in production to more than 30M wafers per month. In our opinion, global revenue at the close of 2024 will rise at ((CAGR)) +7% though the CEO forecasts it can be up or down 5%.
• Likewise, we expect the semiconductor foundry business that Tower is in, to grow this year by +7% benefitting from the previous improving economic conditions. Tower is the second-largest semiconductor foundry manufacturer worldwide and is bound to benefit from improving chip-market conditions.
• Tower's valuation metrics get high marks in almost every category compared to the sector median. The PE ratio average for the industry is over 26x whereas Tower's is 5.98x. Short interest is less than 2%.
• Finally, Tower and Intel are not wrathful with one another for Intel putting an end to the buyout. It appears the two are going to work together on the next generation of 300mm chips. There are likely to be more joint ventures in the making. The Chinese did not acquiesce to the deal.

Victor Dergunov, in a new SA article, foresees a potentially brighter future for Intel as it moves to open new plants in Israel and other countries. This can lead to more collaborative projects, as Intel's management goal is to prepare to meet customers' needs. Tower invested $300M from the $353M Intel paid to end negotiations to acquire equipment Tower will install in the new Israel Intel plant. This will give Tower production capacity for 600,000 photo layers per month for its 65nm power management BCD flows, among others. This can possibly lead to reopening a deal between the two down the road if the Chinese change their minds.

Two-Track Processing Systems

Analog and digital processing systems transmit information by transforming them into electric signals. According to Nick Jasuja, a high-traffic website specialist, analog systems transmit signals with time-varying " with small fluctuations in the signal which are meaningful. " Statista's estimates for Analog semiconductor market revenue worldwide from 2009 to 2024 are charted by Statista :

Digital signals, he reports, " use a continuous range of values to represent information… such as numbers or letters…. sounds, images, and other measurements of continuous systems. " Digital and analog have unique properties: waveforms differ, analog equipment tends to be cheaper, and there are differences in applications. Jasuja concludes, " Digital technology has been most efficient in the cellular phone industry. Analog phones have become redundant, even though sound clarity and quality was good. "

Monolithic Power adds that " recent technologies use digital signals because of their advantages with noise immunity, encryption, bandwidth efficiency, and the ability to use repeaters for long-distance transmission (in, for example), communication systems (broadband, cellular), networking and data communications, and digital interfaces for programmability. "

Texas Instruments Inc ( TXN ) claims in a position paper it issued to have an " increasing commitment to analog process leadership " because " Analog process technologies provide sustainable competitive advantage " including multiple process platforms that are optimized individually for speed, precision, power, and density.

Tower Profile

The semiconductor industry includes equipment manufacturers, foundries that make chips for specific client uses, and companies that design and produce chips specifically to the specifications of consumer and industrial product manufacturers. It is an industry sensitive to consumer spending and global politics , as The Wall Street Journal recently reported.

President Biden curbed chip sales and shipments in 2022 to China from American and foreign manufacturers. China might attack Taiwan for its chip manufacturing capacity. And Bloomberg describes Israel as " A small country with an outsized influence on the global chip industry ." The buyout of Israel-based Tower Semiconductor was torpedoed by China.

The industry suffered supply chain interruptions and oversupplies since COVID-19. The fear now is the invasion of Israel by Hamas terrorists might exacerbate semiconductor interruptions if the war becomes more global.

Seeking Alpha ranks Tower 207 out of 551 in the IT sector. It is 19 out of 66 in semiconductors. Tower Semiconductor is now the 13th largest Israel-based company publicly traded on a U. S. stock exchange; it has a $3.32B market cap and total revenue of nearly $1.5B annually.

Tower Semiconductor describes itself as a 30-years old

foundry of high value analog semiconductor solutions, manufactures advanced analog integrated circuits, leading the analog ecosystem with high-quality, innovative technological and manufacturing solutions, providing strong competitive advantages in various growing markets.

It specializes in analog solutions, particularly for Radio Frequency ("RF"), High-Performance Analog ("HPA"), integrated Power Management, CMOS Image Sensors ("CIS"), Non-Imaging Sensors ("NIS"), and Mixed-Signal CMOS, and Micro-Electro-Mechanical Systems ("MEMS") capabilities, process transfer services, and design enablement equipment.

We believe its size, market power, and management sticking to the knitting of its business plan make Tower Semiconductor a worthwhile investment consideration for a long-term Buy opportunity

Valuation

Tower's share price is languishing compared to the SPDR S&P Semiconductor ETF ( XSD ) which is up 28.3% over the last 12 months. XSD sports a Buy rating from S A analysts and S A's Quant Rating system. By contrast, Tower Semiconductor stock is -32% for the last year and nearly 3% YTD.

S A's Quant Rating for Tower was just upgraded from a Hold rating to a Buy rating. The S A Factor Grades for valuation, growth, and profitability are high. Momentum is just a C- that we attribute to the failed buyout, the initial impact of the war, and a mixed third-quarter report.

Company revenue is down from the last 2 years but at TTM revenue, gross profit, and cash flow from operations are stable and appear to be making a comeback. We believe the stock is undervalued

In 2020 revenue was $1.265B. In 2021 revenue was $1.5B; in 2022 revenue was $1.677B and TTM revenue stands at $1.47B.

Gross profit and cash flow were:

TTM 2022 2021 2020

Regarding the Israel-Hamas war factor, we were initially worried about the impact on share prices. In early October, the invasion threatened Israel's economic growth and fear that a national call-up of 300K soldiers can stall production, as we have noted in previous articles . Stocks of Israel-based companies publicly traded on American exchanges are doing good for the most part. Even Tower shares are moving back up.

When we take the P/E Non-GAAP figure of 14.66x times an EPS of $1.93 to $2.06 for FY '23, the shares are worth about $30 each. We expect an increase in demand, benefits from collaborating with Intel, and increased market momentum can drive the stock higher. Note, Tower's EPS beat estimates in 7 of the last 8 quarters.

Other positive financial considerations about Tower are shareholder equity is $2.3B and debt is a mere $227.6M. Debt-to-equity is a 9.7% ratio. Assets and liabilities total $2.8B and $487.0M, respectively. Tower Semiconductor's EBIT is $241.2M.

Takeaway

We do not foresee any significant headwinds that will drive down the share price significantly. However, impediments to growth are of concern. The growth metrics are poor to average. The forecasts for revenue, EBIT, and free cash flow per share are the most concerning. EPS growth, ROE, and CAPEX appear strong compared to the sector median. If the company can increase its gross margin back up to 32% from the current 28% as demand for analog chips revives, the shares can potentially move up into the $33 to $34 range in 2024. Any dip in share price makes owning Tower shares more attractive.

Hedge fund trading activity among the 31 funds owning the stock has been steady over the past year. The funds increased holdings by nearly 3M shares last quarter, as the share price increased. This appears to us to be a fairly safe investment opportunity at this time for retail value investors.

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