Semiconductors are at the heart of modern technology, and manufacturing these increasingly complex devices is one of the biggest challenges facing the industry today. To improve performance, transistors (the building block of a semiconductor device) need to switch faster. To allow for longer battery life and thinner form factors, these transistors need to use less power and put out less heat. The two companies on this list are "unsung heroes" of the semiconductor industry, providing essential equipment for the manufacture of these sophisticated devices.
FSI International (FSII) designs and manufactures tools for semiconductor fabrication. In particular, they offer wafer surface cleaning/conditioning equipment, which is critical to semiconductor fabrication. With the increase in CapEx at Intel (INTC), Taiwan Semiconductor (TSM), United Microelectronics Corporation, Samsung and others, I expect that semiconductor manufacturing equipment manufacturers should see significant tailwinds, especially going into the holiday season, which is typically a strong quarter for PC, tablet, and phone sales.
On a company specific level, the company is trading at just 11.55 times past earnings and a scant 5.42 times forward earnings. Further, the company is sitting on a hefty $48M cash position, which represents nearly a third of the company's market capitalization. In addition to this, quarterly revenue growth on a year-over-year basis is a staggering 98%. Quarterly earnings growth year-over-year is an even more impressive 144%, which implies that the company is keeping unnecessary spending in check even as it grows. FSI International seems inexpensive relative to its larger competitor, Lam Research (LRCX), which trades at 24.98 times past and 7.98 times forward earnings, and had -85.70% year-over-year quarterly earnings growth and -1.40 year-over-year quarterly revenue growth.
The stock is currently trading in the middle of its 52-week range of $1.70 - $5.44, and with a book value of $2.70 a share, I see much more upside potential than downside risk at the last close of $3.58.
United Microelectronics Corporation (UMC) is a pure-play semiconductor manufacturing company, directly competing with the more widely known Taiwan Semiconductor Manufacturing Corporation. With the 28nm shortage hitting the industry hard, many fabless semiconductor companies such as the aforementioned Qualcomm have been trying to find ways to meet demand by moving to alternate suppliers (in fact, UMC has Qualcomm signed on as a second source for their 28nm chips). UMC is behind its larger competitor, but the company recently announced that 28nm development is "progressing smoothly." Further, the company announced a partnership with International Business Machines (IBM) for help in developing a FinFET (similar to Intel's "tri-gate" technology) version of their 20nm transistors.
As the semiconductor industry booms with more smartphones and tablets requiring many chips built on the latest manufacturing processes, UMC will thrive. Trading in the middle of its 52 week range of $1.77 - $2.77 at $2.17, I believe there exists significant upside. Further, the company sports a 3.86% dividend yield at current levels. Additionally, the company trades at 22.84 times past earnings and 12.76 times future earnings with a PEG ratio of 0.72. Finally, book value is $2.72, so at current levels the stock is trading below book value.
UMC's primary foundry competitors are Taiwan Semiconductor Corporation and Global Foundries. On a valuation basis, UMC seems more expensive, as TSMC trades at 15.76 times past earnings and 12.96 times past earnings. However, as the shortage in 28nm node (and beyond) is likely to continue, and since UMC's traditionally been playing second-fiddle to TSM, it is likely that UMC will see significant growth going forward. Further, the company announced that they are looking to sell a strategic 10% equity stake, which could finance a stronger competitive position against its chief competitors going forward.