Taiwan Semiconductor: Why its a "Buy"

Investors have been paying attention to Taiwan this past year, buying up shares of "Taiwan Bullish ETF" the iShares MSCI Taiwan Index (ETF) (NYSE:EWT) while the real winner has been its largest holding, Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM).  Now that Taiwan Semiconductor shares have backed down from their recent 52-week high, its time for a second look.

Shares of Taiwan Semiconductor (TSM) are finally taking a breather, which is producing a buying opportunity for investors.  Shares are currently trending around the 20-day moving average after having run up some 25% in the last quarter.  This presents an opportunity for would-be buyers of Taiwan Semiconductor to get in during a pullback in stock price on a fundamentally sound company.

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ETF vs ACTUAL HOLDINGS
Since March 2007 the iShares MSCI Taiwan Index (EWT) has increased 9%, while Taiwan Semiconductor (TSM) shares ran up 22%. In the last year the Taiwan Semiconductor shares are up 31% compared to EWT's return of 28%, which is why stock picking may win when it comes to investing in Taiwan.

The iShares MSCI Taiwan Index (ETF) (NYSE:EWT) is currently made up the following:

You guessed it, its largest position is Taiwan Semiconductor (TSM).

TSM vs TAIWAN
(http://community.nasdaq.com | Matthew D McCall) Taiwan reported GDP growth of 9.8 percent during the third quarter of 2010, easily beating estimates. However, the government agency lowered its 2011 growth estimates to 4.51 percent from 4.64 percent.

The rise in GDP was led by a 21.9 percent increase in exports during the quarter. Two-thirds of the company's economic output comes from exports, which explains the strong growth.

Taiwan Semiconductor (TSM) is showing good fundamental strength as the most recent quarterly earnings report came with a positive surprise of 7.7% above analyst estimates, and the company has provided modest earnings surprises in 4 of the last 5 quarters.  The company is currently projected to have earnings growth of 15% for the next 5 years as well.  Also analysts have bumped their EPS projections for TSM from $0.24 to $0.25 recently for Q4 earnings, which may not sound like a lot but you better believe it is when there are 25.9B shares outstanding.

Currently TSM provides a reasonable value play as well.  Their price-to-earnings multiple of 13.0 is lower than average for its industry (22.6) and the S&P 500 (20.1), making Taiwan Semi attractive from a value standpoint.  The company also boasts a higher price-to-sales multiple at 4.85, outpacing its industry peers that have a 4.10 price-to-sales.  TSM also boasts a lucrative looking 38.4% net profit margin, crushing the S&P’s average profit margin of 12.3% and Semiconductor - Integrated Circuits Industry average of 23.7%.

Bottom line: If you are thinking about investing in Taiwan via the EWT, it may pay to let it all ride on Taiwan Semiconductor (TSM), after all, its been fueling the ETF and has decent growth forecasted.  At this point, we believe TSM provides a good buying opportunity in a proven company while shares are reasonably valued.

Disclaimer: No authors at WallStNation.com have any positions in the securities mentioned in this publication.