Monday, May 14, 2018

A current AIM International Fund Holding: Tokyo Electron Limited. (TOELY) by Arsh Salwan. "It's SemiElectric"

Tokyo Electron Limited (TOELY, $48.24): “It’s SemiElectric”

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.


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