Taiwan Semiconductor Expects To Ride Trend To 2016


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ChipmakerTaiwan Semiconductor ( TSM ) belongs to an elite club.

The stock has gained ground during this market correction, even as the chip group has lost more than the indexes.

The S&P 500 has fallen about 8% since mid-September. The semiconductor industry group has fallen 15%. Yet, Taiwan Semiconductor is up 4% in the same period.

Why is the market avoiding chipmaker stocks while it cozies up to Taiwan Semiconductor?

Earnings and revenue provide the simplest answer. Taiwan Semiconductor reported Q3 earnings growth of 68% in Q3 on a 38% revenue gain. Among the other 16 chipmaker stocks trading above 12 a share, none enjoyed a quarter even close to that sharp growth.

In October, the strength continued. The world's biggest contract chipmaker reported that sales in October jumped 32% from the year-ago period.

Founder and CEO Morris Chang, who reclaimed the CEO role in 2009, said the company did better in Q3 than even management expected. "We think the reason is the strength of mobile product demand," he said at the Oct. 25 earnings call.

While demand for computers was soft in Q3, mobile devices showed no slowdown, especially in China.

This played to Taiwan Semiconductor's strength. The company is the foundry leader in mobile integrated circuits.

In the 28-nanometer space, Taiwan Semiconductor's revenue and shipments more than doubled in the third quarter.

Tiny is boss in chips. Smaller chips are generally faster and more power-efficient. As of late 2011, most high-end smartphones were using 45-nanometer processors.

The move is on to 28-nanometer.

The 28-nanometer business made up 13% of Taiwan Semiconductor's total wafer revenue in Q3, up from 7% in Q2. The company expects 28-nanometer revenue will be more than 20% of wafer revenue in Q4, and more than 30% in 2013.

Chang said he expects mobile products to fuel growth at Taiwan Semiconductor "for a number of years," specifically 2013 to 2016.

The stock's annualized dividend yield is about 2.5%.

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: Personal Finance , Investing Ideas

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