Taiwan Semiconductor Manufacturing Company (TSM) is one of the world's largest pure play foundries. March top and bottom-line results met consensus estimates. The majority of excess inventory in the channel has been worked through, and management has guided weaker capital expenditures in 2008. We do not feel the move to reduce capital expenditures foreshadows weakness in the industry rather that the firm had added quite enough 90 nanometer capacity in the past several quarters. We are reiterating our Hold rating with a target price of $11.00.
Taiwan Semiconductor should continue to benefit from its dominant market position, particularly in the 130-nanometer (nm) market, which is the key revenue driver. We believe the development of the 90nm chip will drive growth over the near-term. Foundry revenue is expected to grow at a faster pace than the rest of the semiconductor industry.
Taiwan Semiconductor is currently trading at 15.2x our 2008 earnings estimate per American Depository Receipt (ADR), which is a significant discount compared to the industry median multiple. Examining its price/earnings growth ratio (PEG), we find that TSM is relatively attractive, considering our projected five-year growth rate assumption of 20% annually.
We believe TSMC's multiple can expand from here, assuming the capital expenditure decrease has more to do with the firm's execution strategy. Our implied forward multiple is 15.6x our fiscal 2008 estimate, which derives our target price of $11.00.
Read the full analyst report on TSM
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.