Buying stocks that are trading at a level below, or slightly above, tangible book value almost always works out better than purchasing companies selling far above physical asset value. When buying a business, usually, you can be fairly certain you are getting a good price when you do not pay much more than the tangible value of its assets.
I am going to be taking a look at three semiconductor companies. Sadly, none of them are trading below book value. But none trade at a level extremely far above book value either.
Headquartered in Singapore, Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) is the cheapest of the three relative to its book value. Hailing from the Netherlands, ASM International NV (ADR) (NASDAQ:ASMI) is more expensive, on a book value basis, than Kulicke and Soffa Industries Inc. (NASDAQ:KLIC), although it does have a lower price to book ratio than the king of the semiconductor industry Intel Corporation (NASDAQ:INTC). (It should be noted that Intel holds a 4% stake in ASM International NV (ADR) (NASDAQ:ASMI).)
How these companies differ
While all three companies are in the semiconductor industry, product lines are not exactly the same. Semiconductors are used in a variety of applications, for example light emitting diodes and transistors.
Intel Corporation (NASDAQ:INTC) is primarily known for, and generates most of its revenue from, selling microprocessors, or the “brains” of a computer. On the other hand Kulicke and Soffa Industries Inc. (NASDAQ:KLIC), and ASM International NV (ADR) (NASDAQ:ASMI) primarily manufacture components of semiconductor devices (a microprocessor is an example of such a device) and sell them to companies that produce semiconductor devices (like Intel).
Comparing balance sheets
The following table includes figures that can be found on, or derived from, each of these company’s balance sheet. For context I have also included market capitalization.
|Price/Tangible Book Ratio||2.27||3.14||1.4|
|Total Debt/Equity Ratio||.11||.26||0|
Intel Corporation (NASDAQ:INTC)’s massive market cap indicates that, out of these three companies, it is best equipped to handle financial turbulence. None of these companies has a problem with leverage, all have adequate working capital and low levels of debt.
Purely from a balance sheet perspective, Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) looks attractive to me. It has working capital equal to approximately 75% of its market cap (including $500 million in cash), the lowest price to book ratio of the three, and absolutely zero debt.