Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
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The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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Diplomacy
Means Growth for this Taiwanese High-Tech Firm |
Published:
October 6, 2008
Taiwan's reform-minded president,
Ma Ying-jeou, is making good on his promise to normalize
relations with mainland China. The two countries, which have
been engaged in a 60-year cross-strait staring contest, have
begun to inch toward friendlier ties. China has agreed to let
"Chinese Taipei" join international organizations. Chinese
tourists have been welcomed to the island -- and even allowed to
exchanged their money, something heretofore impossible.
The result of improved diplomatic
relations will be an increase in trade. China is already the top destination for Taiwanese
goods: Taiwan's exports to
China have surged nearly five-fold since 2002 alone. China's
fast-growing economy means rising disposable income for
mainland consumers, and you can bet they'll spend some of that cash
on Taiwanese goods such as flat-panel TVs, computers and
networking equipment.
Taiwan
Semiconductor Manufacturing (NYSE: TSM, $8.45) is a semiconductor foundry
that is bound to benefit from increased Taiwanese exports.
The company designs, manufactures, tests, packages and sells
semiconductor chips -- also known as "integrated circuits."
Chips are the building blocks of all sorts of technologies,
including personal computers, cell phones and some household appliances.
Catalysts: The primary catalyst for the company
is a growing trend among semiconductor firms to outsource the
actual manufacture of chips. Factories for chip production,
known as fabrication plants or simply "fabs," are
extremely expensive to build, costing billions of dollars.
Even worse, semiconductor technology is constantly evolving and
becoming more complex. As any consumer that has ever purchased a
new electronic device knows, the prices of products like
televisions, PCs and phones tend to drop rapidly the longer that
product is on the market. The same situation is true of
integrated circuits -- that means operations need to be upgraded
on a regular basis to handle the newest, most expensive chips
with the highest profit margins.
As a result of all these expenses, a number of major
semiconductor producers have decided to change their business
model. Instead of building fabs for all the chips they produce,
many have decided to design chips in-house and outsource the
actual manufacturing. Texas Instruments (NYSE: TXN), a leader in
cellular telephone components, is just one of the companies to
recently announce plans to outsource chip manufacturing to
foundries like Taiwan Semiconductor.
Competitive Advantages: TSM's main advantage is
size and scale. The company is the largest chip foundry in the
world and, according to the company, controls more than half the
global market.
As noted earlier, building and updating fabs is important, yet
expensive. Most of these costs are fixed -- up-front
construction costs are a perfect example. The trick to squeezing
higher margins out of high fixed-cost businesses is volume.
Because the TSM accepts orders from dozens of chip companies, it
can spread the cost of building new fabs over a huge number of
orders. In short, the company garners significant economies of
scale in manufacturing.
But size and scale benefit far more than manufacturing.
Designing and building more advanced chips requires considerable
spending on research and development (R&D). TSM's huge size
makes it far easier for them to fund the massive R&D budgets
required to innovate new chip designs.
Valuation and Outlook: The stock trades at 12
times estimated 2008 earnings and has a long-term estimated
growth rate approaching +18%. That gives the company a
price-to-earning-to-growth (PEG) ratio of less than 0.7, cheap
by any measure, particularly for a global market leader.
The foundry business is highly competitive, and you might expect
these firms to have thin profit margins. But TSM's larger size
and more sophisticated R&D operations give it an edge; it's +34%
profit margin is roughly double the industry average.
A weakening U.S. economy has cut demand for consumer electronic
products and related chips. Nonetheless, sales of electronics in
emerging markets, including China, remain strong, offsetting
that weakness. And Taiwan's warming relationship with Beijing
should open up new markets and allow the firm to invest more
heavily in mainland semiconductor foundries -- such plants offer
the advantage of extremely low labor costs.
Action to Take --> TSM is
a world leader in the foundry industry. While the business is
cyclical, strong growth in emerging market demand has offset
some of the normal cyclicality over the past few years. TSM
looks like a solid long-term "Buy" candidate for more aggressive
investors.
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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