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Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (TSM), Microchip Technology Inc. (MCHP): The Chip Rebound Continues

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Microchip Technology Inc. (NASDAQ:MCHP) is getting ready to ramp up production to meet increasing demand in the chip sector. That’s good news for companies like Microchip, United Microelectronics Corp (ADR) (NYSE:UMC), and Taiwan Semiconductor (NYSE:TSM) Manufacturing.

Microchip Technology Inc. (NASDAQ:MCHP)

A good call

Early in the year, Microchip Technology Inc. (NASDAQ:MCHP) CEO Steve Sanghi said, “We believe the December quarter was the bottom of this cycle for Microchip…” Almost half way into the year, it looks like he was right. In early June he added, “We expect our inventory to be fully corrected by the end of the June 2013 quarter. Unless we take immediate action, the risk is that our inventory will go too low…”

After using a rotating time off schedule to reduce output, the company is now calling employees back to work. Moreover, it is looking for its facilities to “… prepare to ramp production…” to meet increasing demand.

Back on top

Microchip Technology Inc. (NASDAQ:MCHP) was spun off from General Instrument in 1989. It is a world leader in microcontrollers, the chips that perform the relatively simple tasks of everyday items like remote controls and microwaves. These are, largely, commodity items. However, to change a chip supplier would require customers to make notable design changes to their products. As such, contracts for these chips tend to be long-term.

Microchip Technology Inc. (NASDAQ:MCHP)’s big business is in the older 8 bit space. While competitors have pushed ahead in the more modern 16 bit and 32 bit areas, Microchip isn’t sitting still. Shipments of these chips are increasing rapidly, with its number two industry position in 8 bit chips helping to fund the effort.

The top line contracted in fiscal 2012, but came back strongly in fiscal 2013. Although margins fell sharply, leading to a notable bottom line decline, this isn’t unexpected. The company has to support its facilities no matter how many chips it sells. As it begins to ramp up production, however, the top line should head higher and margins should improve. The bottom line should respond quickly.

The shares have been stuck in neutral for a couple of years, so there’s still time to jump aboard. Moreover, it has a dividend yield of nearly 4%.

The largest foundry in the world

Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) claims to be the world’s first dedicated semiconductor foundry and the largest. Foundries make chips, but don’t design them. So, research and development dollars are spent on upgrading manufacturing capabilities, a key to success in the space.
Taiwan Semiconductor Mfg. Co. Ltd. (TSM)As the largest industry player, Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) has more resources to spend to keep its 14 facilities top notch.

Credit: Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM)

The company’s top line fell in 2009, but has grown each year since. The stock, meanwhile, has been trending higher since the end of the 2007 to 2009 recession. The shares yield around 2%, but are most appropriate for momentum investors because of the industry’s cyclical nature.

That said, April sales were up 13.5% sequentially from March, with year to date sales through April up 25% year over year. Clearly, good things are starting to take shape, which should help boost the top and bottom lines in the year ahead.

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