Analyst Says ChipMOS Could Have 40% Upside


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This past weekend, Neil Martin of Barron's pointed out one company that appears to be rebounding from a rough patch. Investors may get a chance to benefit from an ensuing rise in the company's cash flows, and thus its stock price.

That company is semi-conducter assembler and tester ChipMOS Technologies (NASDAQ: IMOS ).

This stock could be one of few cheap alternatives to play the proliferation of smartphones and tablets. Shares of ChipMOS are trading around 13% higher today. However, they are still trading at a forward P/E ratio around 4, while Apple (NASDAQ: AAPL ) has a forward P/E ratio more than double that, close to 10.5, and Google (NASDAQ: GOOG ) has a forward P/E ratio of around 12.

Why does this stock appear to be so cheap? It has been through the ringer over the past few years. Declining demand and lost customers hit the company hard during and after the financial crisis, with the firm experiencing a net loss of nearly $140 million throughout fiscal 2009.

Benzinga spoke to Analyst Richard Shannon of Craig-Hallum Capital Group to gather his take on ChipMOS. Shannon gives the company a Buy rating.

In ChipMOS Technology's May 18th earnings release, Shannon believes many investors will be paying attention to revenue guidance for the second quarter and seeking reaffirmation of the company's 10% yearly growth estimate.

Shannon also states, however, that he does not believe these metrics are the most relevant data points. "The company's 2Q12 and 2012 sales guidance are not as important as the understanding that [its] cash flow is so much higher than reported net income," voices Shannon, "and that there is such a margin of error built in that it doesn't matter what the sales guidance is."

"There is a good amount of growth available in the LCD market for them," says Shannon. He says he thinks the company will benefit from a product mix shift towards LCD semi-conducters. This, along with fading depreciation from capital expenditures that occurred 4-5 years ago, should contribute to earnings growth to compliment the company's encouraging cash flows.

Moreover, Shannon says the proper choice of multiple to evaluate ChipMOS is Price-to-Free-Cash-Flow. ChipMOS currently has a P/FCF ratio around 3.5. Shannon remarks that, by applying a reasonable P/FCF multiple to ChipMOS, he has valuated the company at a price in excess of $20, compared to its current price near $14. He adds, "I wouldn't be surprised if they were an acquisition target, given how cheap they are."

ChipMOS is set to report first quarter earnings on May 18th before market open.

Disclosure: At the time of this writing, I did not own shares of any companies mentioned in this post.

(c) 2012 Benzinga does not provide investment advice. All rights reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: AAPL , GOOG , IMOS

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