Monday, April 6, 2009
(Cont'd from above)...

Jim (cont'd):   

We know from Taiwan Semiconductor (TSM), the worlds largest built to order semi-conductor foundry, which is up 13.2% since I recommended it… at $8.66 on March 11th… and we know from Xylinx (XLNX), that there is a real turn happening in the semis… a move that is based on better than expected numbers… not just the animal spirits of the market becoming more positive… and that is why today I am breaking with my long held practice of only Fridays… because that prevents over eager buyers from sending them up in after hours trading… kind of like the stock markets version of Taft-Hartley cooling off period… and telling you about a speculative semi-conductor play… but don’t be foolish, you still have to do your homework… you still don’t pay up, I promise you… you will lose money if you pay up… I am talking about a company that is, if it isn’t the son of Taiwan Semiconductor… it is at least it’s cousin, or perhaps its non red-headed step-child.

The stock is Siliconware Precision Industries (SPIL)…

There is a mouth full... why don’t we just call it SPIL… Alright, $6 and change… I told you it was speculative… it is a Taiwanese semi-conductor name with an astonishing 8.5% yield… just this morning, DigiTimes, hey you have got to start reading the trade papers… that is the trade paper for Chinese and Taiwanese semi-conductor companies, reported that SPIL announced a 28.9% increase in revenues in March… which is why I couldn’t hold this story any longer… this news came out and no one seemed to care… because they are not reading DigiTimes, they are reading the New York Times… they should be reading DigiTimes… where does the company fit into tech food chain… SPIL is what is known as a backend semi-conductor contract manufacturer… it provides packaging, assembly and test services to a 100 customers worldwide.. many of whose names you know… Intel, Broadcom, AMD, Anvinia, Sanddisk, Marvel Tech, and Xylinx.

Semi-conductors are very small, very sensitive pieces of machinery and you need a company like SPIL to make sure that they are put together the right way… to test them… lots of semi-conductors, I have been to a lot of factories, many of them don’t work… you got to test everything… you have to make sure they work after they have been built… and to package them so that they get damaged by the elements… think SPIL… and now that we are seeing a recovery in the semis, and it is real, I think that SPIL is poised to benefit… many companies in the business have indicated that December was their worst month… and like Taiwan Semi, they have been receiving rush orders since January… this is easy to understand… the gadget retailers were very bearish, so they cut back so heavily on their inventories, than any increase in demand… like we are seeing now… filters all the way thru the food chain… and means more sales for companies like SPIL, that help produce chips...

Think about it right… Best Buy (BBY) reported that great quarter… the Best Buy’s of the world need to replace their depleted inventories… a lot of people are saying, now wait a second Jim, that is just inventory filling again… well that is how every bottom is… this is how it start… they have to start some where… the numbers here are truly better than expected… unlike many other stocks that are simply going higher because the street has become more bullish about the market… SPIL’s accumulated first quarter sales are now expected to fall… they are going to fall… 26% sequentially, but that is better than the previous expectations of a 35% decline… house of pleasure instead of house of pain… and the second quarter, the analysts now think that SPIL’s sales could grow by 15% to 20%… thanks to resumed orders from everything from hand set chips, you know semiconductors go into cell phones… to graphic processors and integrated circuits used in Telco equipment… in February analysts expected SPIL’s utilization rate would fall below 45%… boy, what a depression… that it would be operating at less than half of capacity… but now it looks like the companies utilization rate climbed to between 55% and 60% in March… I know still way down from its high… but that is okay.

On its last earnings call SPIL said that it saw no signs of recovery in the near term.. the recovery really was not anticipated by anyone… including the companies.. and that is precisely what makes SPIL and the other companies that are involved in this semiconductor food chain so attractive right now… in order to deal with the slow down in business, SPIL had taken a bunch of actions to cut costs…. and these are moves that should really pay off, now that we are seeing a recovery in the semis… SPIL eliminated overtime pay, that should save roughly $180m in new Taiwan dollars per quarter… and that is on top of a 3.3% head count reduction that the company put thru in the 4th quarter… and SPIL has also shut down unused production lines to minimize its fixed costs… it has done everything right… and now it is a leaner, meaner company that can package and test more chips for less money.

And then there is the dividend… you have got to love a big dividend… SPIL intends to pay out a massive dividend this year, brings the yield to 8.5%… a payout that I think is Marathon Man like, as it will only eat up about a third of the cash that the company has on hand… you just don’t get that notoriously B.I.G. juicy yield with most speculative semiconductor names… the dividend really does limit your downside… it is the reason that I am talking about a speculative stock on Monday… other than the fact that the DigiTimes story came out, when I am almost always making you wait until Friday.

Here is the bottom line…

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