Magnachip: A Small Cap Semiconductor Stock Worth a Look

| About: MagnaChip Semiconductor (MX)
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With the Russell 2000 trading near it's all time high, now isn't the time to buy a small-cap index fund such as the iShares Russell 2000 (NYSE: IWM). Rather, now is the time to perform thorough and extensive research to find stocks that offer attractive growth and trade at decent valuations and have been overlooked by other investors and analysts.

I have several on my watch list that I will be sharing with you over the next few weeks. Last week, I brought you DUSA pharmaceuticals (NASDAQ:DUSA). Since writing the report the stock has jumped 11.4%. Today I'll tell you about another undervalued small-cap gem that could reward investors in the years to come.

The company is South Korean semiconductor products maker Magnachip (NYSE: MX).

According to the World Semiconductor Trade Statistics, the global semiconductor market grew ninety-six percent over the last ten years and is expected to continue to grow at a compounded annual growth rate of eight percent.

The Asia Pacific region has seen the most rapid growth over the past ten years and now accounts for more than fifty percent of the global semiconductor market, compared to less than twenty percent for the United States.

The growth in the semiconductor industry is thanks to huge demand from emerging market countries. In addition, semiconductor technology is now used in a wider range of electronic devices that we have come to enjoy in our everyday life, including nearly every electronic device.

Magnachip has a broad mix of interesting technology for high volume consumer applications such as mobile phones, flat panel displays, notebook computers and digital cameras to name a few. Its customers include LG (NYSE: LG), Hitachi (OTC:HICTF), Samsung (OTC:SSNLF), Nintendo (NYDOY: PK) and Nokia (NYSE: NOK) and the tech-behemoth Apple (Nasdaq: AAPL).

After emerging from bankruptcy protection in 2009, Magnachip had its Initial Public Offering (IPO) in March. The company exited bankruptcy with flying colors, and now has a pristine balance sheet with much less debt. The company is also cash rich, with $194 million in cash on its balance sheet. For a company with a market capitalization of just $562 million, having 35 percent of the company's value in cash is quite significant.

Last year the company increased revenues by 38 percent to $779 million in 2010. It currently sells for seven times earnings. However, net income did decrease by $765 million in 2010 due to a one-time reorganization charge of $805 million. But the one-time charge is now in the rear-view mirror, and was just a necessary evil in what is otherwise an undervalued and growing company.

In its most recent quarterly report, Mangachip reported a gross profit of $56.5 million compared to $49.4 million for first quarter of 2010. This is impressive because the semiconductor industry is highly cyclical and the first quarter is typically weak. It also raised its outlook for 2011. Magnachip expects gross profit, as a percent of revenue, to increase from 1.5 percent to 3.0 percent quarter-over-quarter.

Magnachip is more than a turnaround story though. There appears to be growth on the horizon for the company. This stems from its deal with Apple and most recently, Atmel (Nasdaq: ATML).

Magnachip provides the technology for Apple's iPad and Atmel's touch screens. The iPad has been selling well in Asia and should continue to do so going forward. Just like in the U.S., the rollout in Asia drew hundreds of thousands of interested customers. The iPad's continued success will have a direct impact on growing revenues at a healthy rate.

Major investment banks, including Barclays (NYSE:BCS), Citigroup (NYSE:C) and Deutsche Bank (NYSE:DB) are beginning to take notice of Magnachip's growth potential. The average analyst estimate for the stock is $19, which is about 30 percent higher than the recent share price.

At the end of the day, Magnachip is growing rapidly and undervalued. Some investors may have written off the stock after its bankruptcy, but the restructuring and strong cash position of nearly $200 million shows that this company is in good financial health, and should continue to benefit from increased semiconductor use around the world.

The company continues to demonstrate revenue and margin expansion since 2009 and has made the most of its recent technological innovations. And the deals with Apple and Atmel should only act as a base to further their customer relationships while becoming a leader in innovation. For investors, this stock could be a winner.