STMicroelectronics N.V. (STM) is a global independent semiconductor company, which designs, develops, manufactures, and markets a broad range of semiconductor integrated circuits (ICs) and discrete devices.
Shares of STMicroelectronics are trading at a level where they are fairly valued in relation to its peers, in our opinion. We feel STM should trade between 18.1x to 18.5x our adjusted 2008 estimates until we have more visibility into 2008 after the restructuring of its manufacturing facilities and integration of acquired companies which are expected to be dilutive to earnings in the near term.
Therefore, we have fixed our target price at $13.00 over the next six months, as we remain concerned about the short term outlook of the semiconductor market. Operational synergies derived from the combination with Intel (INTC) and Ericsson may translate into higher profit contribution from subsidiary companies and should enable STM to concentrate on its dual lines of businesses ASP and IMS. This, in turn, should help improve operating margins of its existing businesses.
The partnership with IBM (IBM) should also enable the company to save on technology R&D spending in the long run, although it will take a few quarters for the pieces to be in place to take advantages of this joint effort. The results of the second quarter were off our revenue and earnings estimates (on a U.S. GAAP basis) with an out-performance on the earnings side before accounting for restructuring and impairment charges, and the company is making strides in improving its cost structure even as the dollar continues to weaken against the Euro.
The availability of a common platform for integrated digital TV (iDTV) sets worldwide will open up a new market for STM as it integrates digital and analog broadcasting into a single chip. We feel that the above estimates for 2008 may be attainable for STM and continue to rate the shares a Hold.
Udayan Mukherjee contributed to the report.
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