TSM Stock Study (4-5-23)

I recently did a stock study on Taiwan Semiconductor Manufacturing Co. Ltd. ADR (TSM) with a closing price of $92.17.

M* writes:

     > Taiwan Semiconductor Manufacturing Co. is the world’s largest
     > dedicated chip foundry, with over 57% market share in 2021 per
     > Gartner. TSMC was founded in 1987 as a joint venture of Philips,
     > the government of Taiwan, and private investors. It went public
     > as an ADR in the U.S. in 1997. TSMC’s scale and high-quality
     > technology allow the firm to generate solid operating margins,
     > even in the highly competitive foundry business. Furthermore,
     > the shift to the fabless business model has created tailwinds
     > for TSMC. The foundry leader has an illustrious customer base,
     > including Apple, AMD, and Nvidia, that looks to apply
     > cutting-edge process technologies to its semiconductor designs.

Over the last decade, this mega-sized (> $50B revenue per year) company has grown sales and EPS at annualized rates of 13.5% and 16.5%, respectively. Lines are up, straight, and parallel except for an EPS dip in ’19. PTPM is greater than peer and industry averages. It increased from 36.2% in ’13 to 50.5% in ’22 with a last-5-year average of 42.2%.

ROE was greater than peer and industry averages from ’13-’17 before falling behind in ’18 and beyond. A spike in ’22 to 38.3% boosts the last-5-year average to 27.7%. The lowest ROE in the last 10 years was 21.6% in ’19. Debt-to-Capital has been lower than peer and industry averages. This trended down from 21.4% in ’13 to 9.4% before reversing higher to 23.2% in ’22. The last-5-year average is 17.3%. Interest Coverage is over 90 and Quick Ratio is 2.2. M* gives an Exemplary rating for Capital Allocation and Value Line gives an A++ rating for Financial Strength.

M* also assigns a Wide [stable] economic moat to TSM.

I forecast long-term annualized sales growth of 6% based on the following:

• CNN Business projects 1.5% YOY and 10.4% per year for ’23 and ’22-’24 (based on 6 analysts).
• YF projects YOY 1.2% contraction and 22% growth for ’23 and ’24, respectively (8 analysts).
• Zacks projects YOY growth of 3.4% and 14.2% growth for ’23 and ’24, respectively (1).
• Value Line projects 6.7% annualized growth from ’22-’27.
• CFRA projects growth of zero YOY and 10.9% per year for ’23 and ’22-’24, respectively.
• M* gives 2-year ACE of 7.1% annualized growth along with its analyst forecast of 9.7% annualized for the next 5 years.

I am forecasting below both long-term estimates.

I forecast long-term annualized EPS growth of 8% based on the following:

• CNN Business projects contraction of 14.6% YOY and 2.3% growth per year for ’23 and ’22-’24, respectively (based on 6 analysts), along with 5-year annualized growth of 10.9%.
• MarketWatch projects annualized growth of 3.2% and 7.3% for ’22-’24 and ’22-’25, respectively (38 analysts).
• Nasdaq.com projects 17.4% YOY growth for ’24 (2).
• Seeking Alpha projects 4-year annualized growth of 20.6%.
• YF projects YOY 16.2% contraction and 25.3% growth for ’23 and ’24, respectively (5), along with 5-year annualized growth of 21.5%.
• Zacks projects YOY 15.2% contraction and 17.4% growth for ’23 and ’24, respectively (2), along with 5-year annualized growth of 20.5%.
• Value Line projects 8.8% annualized growth from ’22-’27.
• CFRA projects 15.4% YOY contraction and 4.7% growth per year for ’23 and ’22-’24 along with a 3-year CAGR of 7%.
• M* projects long-term annualized growth of 5%.

Actual EPS spiked over 60% YOY in ’22.

I am forecasting toward the bottom of the long-term-estimate range (mean of six: 14.6%).

My Forecast High P/E is 14. Over the last 10 years, high P/E has ranged from 14.1 (’15) to 34.8 (’21) with a last-5-year average of 27.3. I am forecasting below the entire range.

My Forecast Low P/E is 9. Excluding the upside outlier in ’21 (26.3), over the last 10 years low P/E has ranged from 9.0 (’22) to 15.5 (19) with a last-5-year average of 13.1. I am forecasting at the bottom of the range.

My Low Stock Price Forecast (LSPF) is the default value of $59.90. This is 36% less than the previous closing price and just a hair under the 52-week low ($59.40).

Over the last 10 years, Payout Ratio has ranged from 27.9% (’22) to 58.8% (’18) with outliers from ’15 (0%) and ’19 (90.6%) excluded. The last-5-year average (excluding ’19) is 45.9%. I am forecasting below the entire range at 27%.

These inputs land TSM in the HOLD zone with an U/D ratio of 1.3. The Total Annualized Return (TAR) is 9.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-sized company at 6.2%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on total annualized return (9.9%) instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 424 studies done in the past 90 days (my outlier study along with 127 others excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 10.6%, 9.8%, 23.0, 14.1, and 54.8%. I am lower across the board especially with regard to P/E. Value Line projects a future average annual P/E of 18.0: lower than MS 18.6 and much higher than my 11.5.

With regard to other data, MS high and low EPS are $9.52 and $5.86 compared to my $9.67 and $6.56. My numbers may be higher due to growth in the recent quarter, but I’m surprised my high EPS is not lower due to a lower forecast growth rate. MS has a LSPF of $64.50, which is 9.3% higher than mine. This doesn’t align with the MS default $5.86 * 14.1 = $82.63, but is still quite reasonable being 30% less than the previous close.

The robust MOS backing this study may actually be too much. My forecast P/E range is over 6 points lower than Value Line or MS. Raising Forecast High and/or Low P/E up to 12 points total could put TSM in the BUY zone. In looking at the 10-year P/E ranges, however, nothing jumps out at me to say “this forecast is unreasonably low.”

For now, I remain steadfast and will look to buy under $78/share.