Tower Semi: Finding Its Niche Amidst The Chip Giants

| About: Tower Semiconductor (TSEM)

Tower Semiconductor (Nasdaq: TSEM) will only succeed if it discovers those niches which potential customers consider important enough to be willing to pay the company a premium for its products. One could compare it to corner grocery store located opposite a Wal-Mart branch. How do such stores survive? Some owners of stores like these simply close down claiming, “How can anyone compete when they’ve got a Wal-Mart branch right opposite them.” Others will put some thought into it and find a creative solution, such as giving the store a different character, by making it a delicatessen, for example, or specializing in a service that Wal-Mart doesn’t offer.

Tower will have to find a way of differentiating itself from the crowd, and create an image that will enable it not just to survive, but also to become highly successful. I think that this is why former M-Systems Flash Disk Pioneers president Dov Moran has joined Tower, since the chance of identifying these niches are much better with him on board than they would be without him.

Having followed Tower, I get the impression that the company has taken the right direction. Last week’s agreement with Forza Silicon is just the thing I’m referring to. Forza defines itself as company which was founded to provide creative solutions to customers that are unable to benefit from good service, and who have been ignored by the big semiconductor manufacturers. Companies such as Micron Technology (NYSE:MU), Toshiba , Intel (Nasdaq: INTC), or Samsung Electronics, won’t bother with specialist chip design if the order is less than 50 million units a year. Even a quantity of this size usually isn’t enough. So Forza and Tower are now teaming to set up a center designing specialist chips which, as I understand it, will operate out of Tower’s center in Migdal Hae’emek, Israel.

Tower published its financial report Wednesday and I can say that I am at least satisfied that this old and debt-ridden company finally appears to be on the right track. I saw the change a year ago, with the appointment of Russell Ellwanger as CEO, and the massive support from Israel Corp. Dov Moran would not have accepted the post of chairman if he thought for a moment that the company was continuing its downward slide. On the contrary, I feel that Moran, who is a professional of international renown and, based on my own acquaintance with him, also someone with street savvy, has seen a possibility here to help raise Tower from the floorboards to glory. True, a long road still lies ahead, but it looks as the hardest part is already behind Tower, and what is needed now is smart and proper management. That is something that they certainly do have now.

The most important figure that investors should be guided by at this point in time is the company’s sales, which doubled from 2005 to 2006. Next is cash flow, and there has been a marked improvement here too. Note that the company repaid $158 million of its debt during the second half of 2006. The good thing about Tower is that if it continues like this, then it shouldn’t be affected by the fall in semiconductor business worldwide, as it will have niches to operate in. Although the company still lost $0.47 on every dollar it made in sales in 2006, I am willing to stake my reputation on the likelihood that it can look forward to success, thanks to its management.

A lot of investors are wondering how a stock like Tower is rated “Buy” when the company is posting a loss per share of $0.47 on every dollar in sales and is also weighed down under an age-old sack-load of debts. This is really quite interesting. Just look at Check Point (Nasdaq: CHKP), a real money machine, and then look at Elbit Medical Imaging (Nasdaq: EMITF) and Tower.

During 2006, both these stocks yielded returns that were several times higher than that of Check Point. Elbit Medical’s return was ten times higher while Tower’s was three times higher, and the question is why this is happening. Exactly a year ago, Elbit Medical stood at $16 and it has since soared 160% to $41.50. Tower stood $1.40 a year ago, and it now stands at $2.10, a 50% increase. Check Point, on the other hand, started February 2006 at $21.50 and it is now at $24.80, just 15% higher.

How is this possible? It’s difficult find any explanations aside from the one criterion which is always at play, and which is the most difficult to assess upfront. It is the manner in which serious investors (those that are in for the long-term) assess what is likely to happen. Such assessments are extremely difficult to make, since if you look back a year, you wouldn’t have believed back then that these two companies, Elbit Medical and Tower, were more interesting than Check Point. Quite the opposite. In retrospect, it is now apparent that investors believed in them throughout 2006.

What would cause someone to prefer to invest in a company like Tower, with all the acute problems it has, rather than put his money on Check Point, which has no problems at all? Firstly, it’s not the same money, and second, the speculative money is divided into two types: one is quick entries and exits by day traders and the other is an entry to companies like Tower in the faith that with good management, what I mentioned earlier will indeed come to pass.

Investors of this kind buy large share tranches in stages. My associate Steven, for example, already holds 200,000 Tower shares which he bought at four different opportunities during 2006, and if you ask me, he’ll keep picking them up just as he did with stocks of companies like Orbotech (Nasdaq: ORBK) and M-Systems. This is called building a future position. So why did Tower eventually fall? Because on Wall Street everything is upside down. If the results are good, sell.

Published originally by Globes [online], Israel business news -
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.