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By: Arsh Salwan, AIM Student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
Tokyo Electron Limited ADR (OTC:
TOELY) manufactures, develops, distributes and sells semiconductor
equipment along with flat panel display production equipment. The company
operates in two segments: Semiconductor Production Equipment (98.3% of 2017
Revenue) and FPD Production Equipment (6.2%). The company was found
in 1963 and is headquartered in Tokyo, Japan.
•
The company announced their FY 2018 (April 2017-March 2018) results on April 25,
2018; Net Sales increased 41% YoY.
•
TOELY just completed the construction of its new logistics building and is planning
to open two new buildings, each costing 13 billion yen.
•
Sales increased in Japan by 59.54% YoY and by 17.44% YoY in North America.
•
The YTD stock price change for Tokyo Electron has been 4.95%
Key points: Tokyo Electron has been a vital player in
the semiconductor industry primarily operating in tech, deposition, and clean
segments. As we know, the technology industry is advancing faster than ever and
Tokyo is currently doing its part to stay on pace. The company had an increase
in their steps because of the 3-D transistors and 3-D NAND flash memory. Due to
this, Tokyo has had solid growth and is expected to carry on.
Tokyo
Electron has been expanding for a while now. The Miyagi Plant was built in 2011
and since management expects sales to grow, they decided to expand the facility
in March 2017. Along with this Plant, the company has just announced the
construction of two new buildings, one for manufacturing gas chemical etch
systems and the other for the manufacturing of thermal processing systems.
The
company has benefitted greatly from the new increased demand of semiconductors.
The growth of the Big Data, Artificial Intelligence, and the Internet of Things,
has changed the semiconductor industry. This is the new area that Tokyo
Electron is targeting and is trying to capitalize on the idea of devices being
able to connect with several tools in the world. Currently and in the past, it
has been about smartphones, tablets, etc., TOELY has recognized that this
market is becoming stale and has begun moving towards the more advanced modern
technologies.
With
the various tariffs that President Trump has imposed thus far, including the
$60 billion tariff on Chinese imports, it will be interesting to see whether
the United States Government will impose any tariffs on Japan. If this were to
happen, US companies would turn to domestic companies for semiconductor related
products. This could hurt TOELY severely as about 12.7% of total revenue comes
from the US.
What has the stock done
lately?
On
April 22, 2018 and the week leading up to it, Trump announced his tariffs on
Chinese imports and the stock price dropped -5.16%. On April 25, 2018, Tokyo
Electron announced earnings for FY 2018, the stock price increased by ~7.89%
from April 24-26. TOELY expects revenue to increase by 23.8% by FY 2019 as they
revealed in the report. This played a large part in why the stock price
increased so much.
Past Year Performance: In one year,
TOELY stock is up ~48.57%. At the beginning of February 2018, the stock price
dropped ~16.81%. This was because the 3Q FY 2018 results were in line, but
gross margin, sales, and operating margin were below 2Q levels. This was
disappointing and the stock price demonstrates this.
Source: FactSet
My Takeaway
Toshiki
Kawai, the CEO, has had a goal of keeping Tokyo Electron as diverse as possible
in the semiconductor world. With Tokyo Electron’s presence in the semiconductor
industry, it is important to recognize how far they have come in terms of
adapting to new technology and new trends. While the company has continued to
perform, they have had some hiccups in previous quarters (3Q FY 2018). This is
slightly concerning as a large company like this cannot afford any mistakes,
especially with the increased competition from companies like Applied Materials
and Lam Research. I think the stock potentially has a very strong future but
with the previous missed earnings, I am recommending a “hold” for Tokyo Electron
Limited.
Source: FactSet
