$1.25 Above Tangible Book Value: What's Wrong (And Right) With STMicroelectronics?

| About: STMicroelectronics NV (STM)

On December 27th, SA published my article entitled, Target: How To Profit From Their Current Calamity. In that article, I provided a case study of price movement in the stock of companies previously impacted by security breaches, as well as estimates of costs associated with security lapses. A comment from reader 1939Ford politely expressed disappointment. He had hoped the article would point to companies providing security products designed to prevent the sort of problem experienced by Target. A subsequent article by Quoth the Raven, Buy On The Holiday Blunder Dips, listed several hardware suppliers that could benefit through the introduction of smart cards to the U.S. This, along with my promise to 1939Ford to research security products, led to my discovery of STMicroelectronics (NYSE:STM).


With a market cap of 7 billion, STM is the largest European semiconductor manufacturer. Their product mix includes microprocessors, dedicated ICs, analogue, digital and mixed signal, and semicustom semiconductor devices. STM claims to be the number one global supplier of microcontrollers and MEMS. In the consumer category, STM is the leader in set top boxes, while only Qualcomm (NASDAQ:QCOM) has a larger share of the mobile semiconductor market. STM is one of the three largest suppliers of smart cards, cards designed to prevent financial and public relations debacles like that suffered by Target.

STM has global reach with operations in Europe, Africa, the Middle East, the Americas and Asia. Operations in Asia account for roughly 60% of STM's revenues.

STM ranks Denso (OTCPK:DNZOY), Siemens (SI), General Electric (NYSE:GE), Bosch and Nokia (NYSE:NOK) among others as clients.


On February 3, 2009, STM joined Ericsson in a 50/50 joint venture. The pair ended the agreement on August 2, 2013. Since the dissolution of the two companies' joint venture, a reading of STM's financial statements is akin to perusing the logbook of the HMS Titanic. Weighed down by costs associated with the dissolution, STM reported losses for eight consecutive quarters (the joint venture suffered net losses of $629 million in 2009, $591 million in 2010, $841 million in 2011 and $1.08 billion in 2012).


STM claims to be the number one supplier of microcontrollers and MEMS. iSuppliCorp, a market research firm, predicts MEMS sales will double between 2014 and 2020.

STM is a major player in the smart card industry. Industry experts anticipate a 7.7% CAGR over the next few years for smart card related technology. STM has a large footprint in Asia where India and China are driving explosive increases in smart card use.

The STM automotive section constitutes approximately 20% of STM revenue and has been a bright spot in STM operations. STM claims to be the world's third largest chip provider in that category. Government safety regulations in North America, Asia and Europe combined with consumer desire for MEMS associated automotive technology should lead to a 60% to 70% increase in global demand for MEMS related automotive devices between now and 2020.

Headwinds related to the dissolution of the STM/Ericsson joint venture are waning considerably.

· After eight consecutive quarterly losses, STM is expected to book a mean EPS in Q4 of four cents. (per S&P Capital IQ).

· In Q3, STM experienced sequential growth in their Imaging, Microcontrollers, MEMS and Automotive segments.

· STM closed at $7.68 on January 7, 2013. STM has a tangible book value (MRQ) of 6.43.

· With a Quick ratio of 1.7, Current of 2.3 and LTD of 0.1, debt is not a major concern for investors.

· STM has a dynamic R&D unit with approximately a quarter of their employees devoted to R&D operations. STM currently holds 16,000 patents in 9,000 patent families with hundreds of new patent filings pending.

· STM was set to capitalize on the Cable Digitalization Program in India, particularly in the set-top boxes market; however, legal proceedings in India (unrelated to STM) delayed the process. STM should profit from the eventual renewal of the Cable Digitalization Program.

· According to their 3Q statement, STM has $739,000,000 cash on hand.

· STM has approved their quarterly dividend, which currently stands at 5.11%. From my perspective, this is indicative of a company that has confidence in future operations.


I'm primarily a Dividend Growth Investor; however, I devote a small fraction of my funds to beaten down stocks with growth potential. I use gains in trades from those stocks to fund additional positions in DGI stocks. Consequently, I've taken a small position in STM. I don't pretend to know with certainty when or if STM will turnaround; however, with low debt, reasonable cash and cash equivalents on their balance sheets, broad geographic reach, strong positions in several of the industries' segments, and future tailwinds in MEMS, automotive and smart card markets, I'm willing to hold this position for a lengthy period. Although STM is not an ideal acquisition target, I would not rule out that possibility, particularly considering the value of their proprietary information and R&D activities.

Disclosure: I am long STM, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.