- TSMC suddenly looks cheap…
- …and ESG funds like it!
- Lots of idea-generating content
Last year, amid a global shortage of microchips, US publication National Review labelled Taiwan Semiconductor Manufacturing Company (US:TSM) “the world’s most important company”.
It’s easy to see why. With listings on both the Taipei and New York stock exchanges, TSMC is the dominant producer of integrated circuits on the planet – both the most sophisticated chips as well as many simpler products – and a supplier to the world’s leading hardware and semiconductor designers, including industry peers such as Arm, AMD, Broadcom, Nvidia and Apple.
The ubiquity of microprocessors in the modern world means that when semiconductors are in short supply, the production of everything from cars to smartphones is constrained. At least when oil supplies are tight, western powers can beg Saudi Arabia to turn on the taps.
In short, TSMC’s systemic importance makes it the technology world’s equivalent of a central bank, with the pricing power of a luxury goods firm.
Its shares have also started to look cheap. Following a recent sell-off, they now sit on to a forward price/earnings ratio of 18, down from a 2021 high of 34 and below a five-year average of 20. And while consensus earnings forecasts for 2022 have dipped fractionally in recent weeks, they have been steadily rising for three years.
Analysts now expect earnings of $5.48 and $6.36 per share this year and next, respectively – and in line with a five-year compound annual growth rate of 16 per cent. Maintain that trajectory and TSMC could be generating shareholder profits of $18 a year by 2030.
It’s not all positive. Given its location, TSMC carries a great deal more geopolitical risk than many of its peers. With most of this year’s 21 per cent share price decline occurring since Russia’s invasion of Ukraine, investor minds are undoubtedly more focused on the medium-term threat China poses to Taiwanese statehood than they were a few months ago. What’s more, the war’s unpredictable effects on supply chains and the key semiconductor inputs such as neon could well hamper sales.
But the combined effect of rising broker bullishness and market nerves is a forward price-to-earnings growth (PEG) ratio of 0.9. Absent a sharp downgrade in profit estimates, the stock now looks undervalued.
These fundamentals haven’t been lost on ESG-focused investors, according to this week’s best fund manager idea screen. Recent portfolio disclosures show TSMC is now the second most common top-five holding among a raft of best-in-class UK-based global ESG equity funds. Only Microsoft makes more appearances among sustainable funds.
An entry into a fund’s top-five holdings doesn’t always (or even usually) reflect an entirely new position. Swings in the relative exposure to any given stock are normal, particularly in sell-offs or periods of heightened volatility. But rising allocations to the company still bucks the broader trend among mutual fund managers, who have been heavy net sellers of the stock this year, says FactSet.
Given this, it’s worth dwelling on why sustainable fund managers are so attracted to TSMC.
On the plus side, the company has reduced its own environmental footprint and adopted waste-free or circular manufacturing processes. But its products are ultimately only as sustainable as their end-use applications, even as they become ever more energy efficient.
The principal focus of technological development today may well be lower energy consumption, as TSMC chairman Mark Liu suggests. Naturally, that innovation also requires semiconductors. But until global carbon emissions begin to fall it is hard to argue that the increasingly sophisticated circuitry of our global economy is necessarily positive.
Perhaps we should simply call TSMC for what it is: a quality company trading at a multi-year low.
Further reading:
The role of capital markets in saving the planet and changing capitalism - just kidding (Grote & Zook)
