TSM Stock Study (9-18-23)

Posted by Mark on December 8, 2023 at 07:08 | Last modified: September 18, 2023 14:51

I recently did a stock study on Taiwan Semiconductor Manufacturing Co. Ltd. ADR (TSM) with a closing price of $89.25. Previous studies are here and here.

M* writes:

     > Taiwan Semiconductor Manufacturing Co. is the world’s largest
     > dedicated chip foundry, with almost 60% market share. 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%, respectively. Lines are up, straight, and parallel except for an EPS dip in ’19. PTPM is greater than peer and industry averages and recently trending higher, increasing from 36.2% (’13) to 50.5% (’22) with a last-5-year mean of 42.2%.

Also over the past decade, ROE is about even with peer and industry averages despite increasing from 23.1% in ’13 to 37.4% in ’22 with a last-5-year mean of 27.6%. Debt-to-Capital is less than peer and industry averages, ranging from 9.4% in ’17 to 26.0% in ’21 with a last-5-year mean of 17.2%.

Interest Coverage is >88 and Quick Ratio is 2.1. Value Line gives an A++ rating for Financial Strength. M* gives an “Exemplary” rating for Capital Allocation and assigns the company a “Wide” (and stable) economic moat.

With regard to sales growth:

• CNN Business projects 6.9% YOY contraction and 6.0% growth per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY 12.5% contraction and 22.3% growth for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 13.0% contraction and 20.6% 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 3.3% annualized growth along with its own 5-year annualized estimate of 9.5%.

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

With regard to EPS growth:

• CNN Business projects contraction of 22.2% YOY and 2.2% per year for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year annualized growth of 6.0%.
• MarketWatch projects annualized 4.1% contraction and 4.1% growth for ’22-’24 and ’22-’25, respectively (36 analysts).
• Nasdaq.com projects growth of 20.1% YOY and 19.9% for ’24 and ’23-’25 [3, 3, and 1 analysts(s) for ’23, ’24, and ’25].
• Seeking Alpha projects 4-year annualized growth of 6.0%.
• YF projects YOY 25.0% contraction and 21.6% growth for ’23 and ’24, respectively (6), along with 5-year annualized growth of 6.0%.
• Zacks projects YOY 26.6% contraction and 20.1% growth for ’23 and ’24, respectively (3), along with 5-year annualized growth of 6.0%.
• 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%.

I am forecasting below the long-term-estimate range (mean of six: 6.3%) at 4.0% per year. I will use 2023 Q2 EPS of $6.06/share (annualized) as the initial value rather than ’22 EPS of $6.43.

My Forecast High P/E is 19.0. Over the past decade, high P/E ranges from 14.1 (’15) to 34.8 (’21) with a last-5-year mean of 27.4. The last-10-year median is 19.9, and the last-5-year-mean average P/E is 20.3. I am forecasting below the latter two.

My Forecast Low P/E is 10.0. Over the past decade, low P/E ranges from 9.2 (’22) to 15.5 (’19) with a last-5-year mean of 13.2 (26.3 outlier in ’21 excluded). I am forecasting near the bottom of the range [only ’22 and ’15 (9.5) are less].

My Low Stock Price Forecast (LSPF) of $64.70 is default based on $6.06/share initial value. This is 27.5% less than the previous closing price but 8.9% above the 52-week low.

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

These inputs land TSM in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 10.9%.

PAR (using Forecast Average—not High—P/E) is less than I seek for a large-size company at 5.6%. 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 317 studies (my study and 131 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 8.9%, 8.0%, 23.0, 14.0, and 55.0%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 18.0 is lower than MS (18.5) but higher than mine (14.5).

MS high / low EPS are $8.90 / $5.96 vs. my $7.37 / $6.06 (per share). Value Line’s high EPS is $10.00. I am lowest of the 3.

MS LSPF of $69.00 implies a Forecast Low P/E of 11.6, which is less than the above-stated 14.0. MS LSPF is 17.3% less than the default $5.96/share * 14.0 = $83.44, which results in more conservative zoning. MS LSPF is still 6.7% greater than mine.

My TAR (over 15.0% preferred) is much less than the 19.4% from MS.

Despite raising the P/E range compared to my previous TSM study, MOS seems robust.

I track a few different [usually conflicting] valuation metrics. PEG is 3.1 and 3.5 per Zacks and my projected P/E, respectively: both significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.7. Kim Butcher’s “quick and dirty DCF” prices the stock at 13.0 * [$14.80 – ($2.60 + $10.00)] = $28.60, which suggests the stock to be 68.0% undervalued [this strikes me as NMF; I have emailed Kim to ask about it].

Per this study, TSM is a BUY under $80. With a forecast high price at $140.10, TAR should meet my personal [15%] criterion around $70/share.