TSM Stock Study (6-23-23)

Posted by Mark on August 10, 2023 at 07:01 | Last modified: June 23, 2023 10:51

I recently did a stock study on Taiwan Semiconductor Manufacturing Co. Ltd. ADR (TSM) with a closing price of $103.13. The original study is here.

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 past decade, this mega-size (> $50B sales per year) company has grown sales and EPS at annualized rates of 13.5% and 16.4%. Lines are up, straight, and parallel except for an EPS dip in ’19. PTPM is greater than peer and industry averages and trending higher in recent years, increasing from 36.2% in ’13 to 50.5% in ’22 with a last-5-year mean of 42.2%.

Also over the past decade, ROE has been greater than peer and industry averages from ’13-’17 before falling behind in ’18 despite trending higher in recent years. The last-5-year mean is 27.7%. Debt-to-Capital has been lower than peer and industry averages, trending down from 21.4% in ’13 to 9.4% before reversing higher to 23.2% in ’22. The last-5-year mean is 17.3%. Interest Coverage is over 93 and Quick Ratio is 2.0. M* gives an Exemplary rating for Capital Allocation and Value Line gives an A++ rating for Financial Strength.

M* also assigns the company a Wide (stable) Economic Moat.

With regard to sales growth:

• CNN Business projects 4.7% YOY contraction and 7.5% growth per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY 6.3% contraction and 22.2% growth for ’23 and ’24, respectively (12 analysts).
• Zacks projects YOY 5.7% contraction and 14.6% growth for ’23 and ’24, respectively (1).
• Value Line projects 7.3% annualized growth from ’22-’27.
• CFRA projects 3.0% YOY contraction and 9.2% growth per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 5.5% annualized growth along with its estimate of 9.7% annualized for the next 5 years.

I am forecasting below both long-term estimates at 5.0%.

With regard to EPS growth:

• CNN Business projects contraction of 19.1% YOY and 0.7% per year for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year annualized growth of 3.3%.
• MarketWatch projects annualized growth of 0.2% and 6.1% for ’22-’24 and ’22-’25, respectively (37 analysts).
• Nasdaq.com projects 17.7% YOY growth for ’24 (3).
• Seeking Alpha projects 4-year annualized growth of 5.4%.
• YF projects YOY 22.0% contraction and 24.7% growth for ’23 and ’24, respectively (8), along with 5-year annualized growth of 21.5%.
• Zacks projects YOY 19.0% contraction and 17.7% growth for ’23 and ’24, respectively (3).
• Value Line projects 8.8% annualized growth from ’22-’27.
• CFRA projects 20.3% YOY contraction and 0.7% growth per year for ’23 and ’22-’24 along with a 3-year CAGR of 5.0%.
• M* projects long-term annualized growth of 4.8%.

Actual EPS spiked over 60% YOY in ’22.

Estimates have decreased since my study three months ago. I am forecasting toward the bottom of the long-term-estimate range (mean of five: 8.8%; this drops to 5.6% with the YF estimate excluded) at 4.0%. My initial value is ’22 EPS of $6.43/share rather than ’23 Q1 EPS of $6.47 (annualized).

My Forecast High P/E is 14.0. Over the past decade, high P/E has ranged from 14.1 (’15) to 34.8 (’21) with a last-5-year mean of 27.4. The last-5-year-mean average P/E is 20.3. I am forecasting below the entire range.

My Forecast Low P/E is 10.0. Over the past decade, low P/E has ranged from 9.0 (’22) to 15.5 (19) with a last-5-year mean of 13.2 (26.3 in ’21 excluded). I am forecasting near the low end of the range (only 9.5 in ’15 and the ’22 value are lower).

My Low Stock Price Forecast (LSPF) is the default value of $64.30 based on $6.43/share initial value. This is 37.7% less than the previous closing price but still 8.2% above the 52-week low [tough to buy when near 52-week high!].

Over the past decade, Payout Ratio has ranged from 28.6% (’22) to 58.8% (’18) with outliers from ’15 (0%) and ’19 (90.6%) excluded. The last-5-year average (excluding ’19) is 46.1%. I am forecasting below the entire range at 28.0%.

These inputs land TSM in the SELL zone with a U/D ratio of 0.2. Total Annualized Return (TAR) is 3.3%.

PAR (using Forecast Average—not High—P/E) is less than the current yield on T-bills at 0.6%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 394 studies over the past 90 days (my study and 113 other outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 9.6%, 8.5%, 22.5, 13.6, and 55.0%, respectively. I am lower across the board. Value Line projects an average annual P/E of 18.0, which is lower than MS (19.1) and much higher than mine (12.0).

MS high (low) EPS is $9.45/share ($6.08/share) vs. my $7.88 ($6.47). My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $65.60 implies a Forecast Low P/E of 10.8 (vs. the above-stated 13.6). This is 20.7% less than the default value $6.08 * 13.6 = $82.69, which represents more conservative zoning. It remains 2.0% higher than mine, however.

MOS seems quite robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are other valuation metrics I have recently begun to monitor. I calculate PEG ~4.0 (upper limit generally regarded to be 1.5) while Relative Value (M* data) is 0.78. In this case, the latter seems attractive whereas the former is not.

I would look to re-evaluate TSM under $76/share.