Cramer’s been extremely bearish on semiconductors for a while now. In fact, you could say he’s downright loathed the sector. Tech on the whole hasn’t given him reason to be positive, either. But something that happened Tuesday might change all of this.
Taiwan Semiconductor pre-announced better-than-expected sales and margin numbers thanks to Chinese demand and a strong U.S. dollar. Chip inventories dropped significantly in December, so the demand is now overwhelming supply. That means prices should go higher. And Taiwan Semi, which Cramer called the most efficient, profit-focused outfit in the business, is best positioned to reap the benefits.
Taiwan Semi makes chips for companies that lack their own facilities to do so, such as Qualcomm , NVIDIA , Broadcom and Marvell Tech . Cramer thinks the rush in orders mentioned in yesterday’s preannouncement is most likely an indication that these guys also let their inventories get too low. Now they’re running to TSN to catch them up.
The rest of the demand, as we said, is coming from China, specifically in the 3G cell-phone space. China is spending $40 billion just to build out its wireless infrastructure. But there’s also demand for LCD televisions. And the Chinese government is offering a 13% rebate to consumers in rural areas who buy PCs. The largest distributor of information technology and consumer electronics in Taiwan, Synnex Technologies, expects increased PCs and peripherals sales as a result of these government subsidies. As Cramer said, good news in these areas is good news for Taiwan Semi.
The company also just signed a deal with Intel to build chips for its infinitesimal Atom processor, which will be used in smartphones, handsets and consumer electronics. The arrangement lets Intel get a leg in on new markets, while Taiwan Semi gets a new customer and more business. These former competitors have become collaborators.
TSM is trading at 27 times earnings, which makes the stock look expensive. But Cramer said that’s the wrong metric to use. Investors should look rather to the price-to-book value and compare today’s number to that of the dot-com bubble.
Right now Taiwan Semi’s price-to-book multiple is 2.5, which is close to 2001 levels when utilization rates, margins, return on invested capital and return on equity were all similar. Put simply, the stock took off the last time it was at these valuations, but the industry consolidation that’s happened since should allow TSM to ramp up much faster this time around. Between the increased orders and potential hedge fund interest – they’ll latch onto a tech name with momentum – Cramer thinks there’s a great chance for profits here.
TSM is about flat for 2009 so far, but it does pay out what looks like a safe 4.6% dividend yield. The stock closed Wednesday at $8.66, but Cramer recommended waiting for it to pull back to the $7s before buying. But if the eager investor wants to start a position at these levels, he wouldn’t try to dissuade them.
Cramer's charitable trust owns Qualcomm.
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