Semiconductor Equipment and Material - Growth in Taiwan and China

By: Steve Rubis



Recommendation:
Our interest in this space is due to the multiple articles on ChipMOS Tech Bermuda (IMOS) and its inexpensive valuation. Analysis suggests that IMOS is undervalued, but the rest of this space seems fairly valued. Semi.org, the semiconductor trade organization, sees 1% growth in revenue for equipment and 10% for materials in 2007 and 2008. Furthermore, it identifies China and Taiwan as the hottest growth areas for this industry; IMOS operates in Taiwan. The industry is ranked 76 out of 197 companies according to the July 16, 2007, Investors Business Daily.

Investment Thesis:
ChipMOS Tech Bermuda (IMOS) trades at depression levels. The company is significantly undervalued on a P/E, P/S, and P/B basis. Semi.org’s outlook on the industry makes us think, despite a low Altman Z Score, that IMOS is truly a bargain.

Industry Metrics:
Table 1: Key Financial Metrics for the Semiconductor Equipment and Materials


The Semiconductor Equipment and Material industry is somewhat mature given that 22 out of 25 companies are mid or large cap companies. Relative metrics for the industry are reasonable; the 22.5 P/E seems quite reasonable for a technology industry such as this. The high cost of capital is expected given the risks due to the cyclical nature of the industry. Finally, management seems to be average given the modest returns on assets and equity.

Valuation:
Table 2: Average Per Share Values for the Semiconductor Equipment and Material


Investors can see from the metrics above that the industry is fairly priced. The gap between earnings power value and reproduction value should be alarming to investors. Such a gap suggests that the reproduction value is overstated, since the earnings power should be worth more than the assets.

Financial Health
Table 3: Altman Z Score for Selected Semiconductor Equipment and Material Stocks


The Altman Z Score for these four companies result in a view opposite to our thesis. These scores suggest that IMOS is undervalued because some might believe it will experience financial distress. This presents a dichotomy because industry estimates suggest growth, but the financials suggest trouble. The distressed valuation that IMOS sports suggests that any possible financial troubles are reflected in the current price.

Business Prospects:
Full Article From Semi.org on Semiconductor Materials Outlook

Full Article From Semi.org on Semiconductor Equipment Outlook

Eric Savitz Reports on Semiconductor Equipment Stocks

Best Values:
1.) ChipMOS Tech Bermuda (IMOS): roughly 75% undervalued, the stock is attractive on all valuation metrics

*The author owns 400 shares of IMOS at a price of $6.90.
**The author currently owns: A, BRP, BTEL.OB, COP, IMOS, and VRGY.
***The author cannot be held responsible for monies gained or lost due to trades undertaken based on information presented herein.
****Financial data comes from Yahoo!Finance.