Up to 10% Yearly Sales Growth for Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM)

August 1, 2016

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Taiwan Semiconductor Mfg. Co. Ltd.

Jeffrey Erickson, Head of Investment Strategies at Abbot Downing, expects Taiwan Semiconductor Mfg. Co. Ltd.’s (ADR) (NYSE:TSM) sales growth to continue to be between 8% to 10% per year.

[Taiwan Semiconductor] would be the world industry leader in the dedicated foundry business. They are almost five times larger than the number-two competitor and larger than the next 10 competitors combined.

It’s an industry where it’s capital-intensive and technology-intensive, and what they’ve been very good at over many years is to be first to the market. So they capture the initial orders, and in this industry, as you ramp up volume, you drive down the unit cost. So if you’re first to market, that’s important because you’re getting that initial volume, and you’re driving down your unit cost of the semiconductors.

So they’ve been able to be the cost leader over time, and as a result, that’s been able to fuel their growth. So this is a case where they’ve been able to enjoy sales growth of 8% to 10% per year. We think that that’s going to continue. We don’t really expect a lot of improvement in margin because their margins are already very good, and they really manage the business so that as they drive cost down, they’re passing that along to their customers and improving their competitive position.

So we’re looking for 8% to 10% earnings growth over time in a company with a p/e rate right now of 12 times next years’ earnings, so relatively attractive earnings, strong CFROI. They’ve been very good managers of the cash that they generate, it’s got a nice dividend yield of 3.8%, and while the semi industry is cyclical, they’ve done a very good job of managing through the cycles over time.

Jeffrey R. Erickson
Jeffrey Erickson