Comparative Valuation of Selected Semiconductor Equipment and Material Stocks

By: Steve Rubis

ChipMOS Tech Bermuda (IMOS) Looks Attractive

Recommendation:
We reiterate our interest in ChipMOS Tech Bermuda as an undervalued opportunity. The company sports a depression level price due to a low Altman Z Score and a convoluted management / ownership structure. These issues are reflected in IMOS’s current price which is slightly above book value.

Valuation Comparison:
Table 1: Equity Valuations for the Top Values in the Semiconductor Equipment and Material Industry


The four companies in our comparison appeared undervalued in our initial valuation analysis. Our comparison suggests that ChipMOS Tech Bermuda offers investors quite a deal. Private equity values are in the $30’s and a relative multiple analysis pegs fair value in the mid-teens to low twenties. Furthermore, ChipMOS Tech Bermuda gives an adequate showing in terms of earning power and reproduction value. The key metric to watch in terms of the IMOS story are profit margins. If IMOS can partake in the estimated industry growth, then the company should trade for at both a higher P/E and P/S ratio. The other three stocks leave something to be desired since they offer little to no margin of safety.

Stock Universe:
Table 2: Undervalued universe for the Semiconductor Equipment and Material Industry


The industry balances in terms of undervalued and overvalued securities. Eight stocks are overvalued while 10 are possibly undervalued. Investors will notice a difference between the percent discounts of Table 1 and Table 2. Differences are results of the use of averages and differences in valuation data used between the two charts. The bulk of the valuation difference is attributable to the earnings power and reproduction values shown on Table 1.

Valuation Calculations:
Table 3: Take Out Valuations for Selected Semiconductor Equipment and Material Stocks


The majority of the selected companies perform well on the private equity value test. The discounts are quite steep for three of the companies ranging from 35% to 79%.

Table 4: Relative Valuation of Selected Semiconductor Equipment and Material Stocks


The same three companies perform strongly on the relative value test as well. Again, the values are quite compelling for ChipMOS Tech Bermuda. Each metric suggests that investors believe that ChipMOS Tech Bermuda will encounter financial difficulty. We will address these concerns in our future write up of ChipMOS Tech Bermuda.

Table 5: Earnings Power and Reproduction Values of Selected Semiconductor Equipment and Material Stocks


ChipsMOS Tech Bermuda provides the strongest showing in a comparison of earnings power and reproduction values. The other companies involved in the comparative analysis all fail this examination. ChipMOS’s showing has interesting implications; the company’s earnings seem to be worth $15 per share and reproducing the business from scratch about $11 per share. These suggested prices make ChipMOS quite attractive because both values are well above the current price. Investors can make a strong case for ChipMOS moving closer to the $11 to $15 range.

The above valuation analysis suggests that investors might be unfairly punishing ChipMOS Tech Bermuda. Investor sentiment led us to taking a position in ChipMOS, and we think the company is worthy of further research.

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

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.