Tuesday, FBR Capital Markets upgraded Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) shares to Outperform from Market Perform and increased its price target to $13 from $12.
Analyst Mehdi Hosseini increased his estimates (post-third quarter report/fourth quarter guidance), increased his price target from $12 to $13, and upgraded shares of TSM to Outperform. Yes, there remain uncertainties associated with holiday sell-through.
However, given the analyst's increased conviction about improving yields and mix, which are expected to help the gross margin improve from 47.7% in third quarter of 2009 to 51%-plus by fourth quarter of 2010, on the back of a recent pullback in the stock (to below $10), he believes an opportunity has been created for investors to play defense, with an option to capture upside in absolute terms, into the final weeks of calendar 2009.
The analyst said that if sell-through is not great, then TSM's FCF margin of 20%-plus and an ROE of 20%-plus, along with its dividend policy, should help it to outperform industry averages. On the other hand, if holiday sell-through is in line, or even better than expected, the analyst then would expect TSM to reach his price target of $13, implying a 30%-plus absolute return.
Specifically, the analyst's checks this week actually indicate that rolling forecasts for first quarter of 2010 wafer shipments have seen a slight improvement, driven by wireless-related customers. The analyst now expects 2010 first quarter's wafer shipment decline to be less than 15%. Additionally, an improving mix is expected to help with higher blended ASPs, especially into first quarter of 2010, thus helping offset lower wafer shipments quarter-over-quarter.
Therefore, with the stock below $10, while the analyst has increased conviction about the U.S. dollar's 1.01 earning power, he encourages investors to accumulate, as TSM offers some of the best protection while also offering an option to capture 30%-plus upside, in case holiday sell-through is in line or even better than expectations.
Currently, TSM is up $0.05 or 0.50% and trading at $10.00.
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