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TSEM: Q4 Results: TowerJazz Plays Out the Year With Record Revenues and Profits

02-14-2017
By Lisa Thompson

NASDAQ:TSEM

TowerJazz (NASDAQ:TSEM) reported Q4 2016 revenues of $340 million versus last year’s $255 million, up 34% and $326 million in Q3 2016. This was in line with guidance and all growth was organic. The company gave midpoint guidance of $330 million in revenue for Q1 2017, pointing to revenue growth of 19%. Gross margins continue to move up with capacity utilization and product mix. Gross margin for the quarter was 25.8% versus 25.3% last year and 24.9% in Q3 2016. While revenues grew 34%, operating income grew 61% to 16% of sales. 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 $0.52 versus $0.16 a year ago. Non-GAAP EPS was $0.52 versus $0.29, up 77%. Adjusted EBITDA was $105 million versus $76 million. At today’s price, this is an enterprise value to EBITDA run rate of 5.3 times.

The company continues to accumulate cash and now has $389 million in cash versus $344 in total debt. Its quick ratio is high at 2.3xs and it has $451 million in working capital. The company is no doubt stockpiling cash for potential acquisitions of fabs or other ventures rather than paying down debt.

Full Year

2016 ended with revenue growth of 30%, operating income growth of 114% and adjusted non-GAAP fully diluted EPS up 195%. Of the 30% growth approximately half was organic and half through the acquisition of the Maxim fab. The company increased cash 89% and reduced debt 19%. Working capital increased 91% to $491 million. Tower is now has a solid balance sheet and should be able to capitalize on this through further acquisitions and capacity growth. It may even be able to attract more customers as its financial situation is much improved and partnering with the company is not the risk it once was. Looking ahead, progress may be less dramatic but should still deliver increasingly better margins until a new underutilized fab is added to the mix.

In the next twelve months, TowerJazz will have to make a decision as to its next move to increase capacity. It needs to either buy or build a fab. 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. There is some hope that industry consolidation in the client base could create some opportunity.

INVESTMENT THESIS

- Although the semiconductor market is typically considered cyclical, we believe that based on the end-user market that TowerJazz’s products are built in to, revenues should continue to steadily grow.
- As a foundry, the company has natural operating leverage given its high fixed costs. Every dollar in revenue tends to add at least $0.50 to gross margin.
- Its largest market segment, RF, was 30% of 2016 revenues. While this segment grew 23% in 2016, the company expects that to increase only 5% in 2017 based on its customers expectations. The remaining 70% of the business ex-Panasonic and Maxim is expected to have double-digit growth between 10-30%.
- The company has a strong market position in high quality imaging and 3D, which is increasing being used for gesturing controls, machine vision, security anti-crash systems and self driving cars, as well as smartphones with high megapixel cameras. In this area its primary competition is Sony, which makes it a preferable source for many companies that compete with Sony.
- Having Panasonic as a partner gives the company increased stature in the industry and has attracted new customers who have a favorable disposition to working with a trusted and known company with high quality product and leading edge expertise in imaging.
- 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 of 16.7 x 2016 EPS versus TSEM’s 12.9 xs. Looking forward to 2017 earnings, the stock could reach $35 per share.

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