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TSEM: Q2 Earnings on Target; Company Guides Up on Q2 Revenues

05/09/2017
By Lisa Thompson

NASDAQ:TSEM

TowerJazz (NASDAQ:TSEM) reported Q1 2017 revenues of $330 million versus last year’s $278 million, up 19% and $340 million in Q4 2016. This was in line with guidance and all growth was organic. The company gave midpoint guidance of $345 million in revenue for Q2 2017, pointing to revenue growth of 13%. 

Gross margins continue to improve with capacity utilization and product mix. Gross margin for the quarter was 25.7% versus 22.1% last year and 25.8% in Q4 2016 based on higher revenues. While revenues grew 19%, operating income grew 44% to 16% of sales, the same margin as in Q4 2016. Operating leverage from Tower’s fixed cost structure should continue to propel earnings growth ahead of revenue growth going forward.

Fully diluted GAAP EPS was $0.45 versus $0.69 a year ago. Non-GAAP EPS was $0.48 versus $0.32, up 42%. Adjusted EBITDA was $101 million versus $78 million a year ago. At today’s price, this is an enterprise value to EBITDA run rate of 5.4 times.
 
2017 Forecast

Giving the company’s revenue guidance for Q2, we are increasing our revenue forecast for the year from $1.367 billion to $1.378 billion. However we are reducing earnings estimates primarily due to a change in our assumption for taxes. In the US and Japan the company pays taxes and we now expect to company to pay as much as $14 million in taxes in 2017 versus the $4 million assumption we previously had. We are now looking for non-GAAP EPS of $1.89 versus our previous $2.10.

Valuation

We believe the stock is currently undervalued on a PE basis versus its peers, as well as by PE to growth rate. Peer companies trade at an average PE of 17.1 times. At an industry average PE, TSEM’s stock should trade at $32.30 per share.

Capacity Utilization and Plans

The company continues to accumulate cash and now has net cash of $86 million versus $37 million a year ago. Its quick ratio is high at 2.5xs and it has $496 million in working capital. The company is no doubt stockpiling cash for potential acquisitions of fabs or other ventures rather than paying down debt. By Q3 or Q4, TowerJazz will have to make a decision as to whether to build out its San Antonio fab or make some other move to increase capacity. It needs to have something in hand by the end of the year to meet 2018 capacity needs. If it were to build a fab, we believe it is having discussions with a municipality in China that would fund the project while Tower provides the equipment and expertise. Alternatively it could seek out a fab for sale from an owner that would still guarantee to use some production capacity much like Panasonic or Maxim did. There is some hope that industry consolidation in the client base could create some opportunity.

Towerjazz San Antonio Fab 

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