United Microelectronics Has Reached A Crossroad (NYSE:UMC)

Shareholders of United Microelectronics (NYSE:UMC), one of many main suppliers of foundry companies to the semiconductor trade, must be happy with how 2023 has gone up to now. The inventory has rallied and outperformed most, regardless of all of the headwinds UMC is going through as revealed in the latest earnings report. Nevertheless, the inventory might have reached a turning level. Why will likely be lined subsequent.

Why UMC might have discovered resistance

The chart under exhibits how UMC has continued the rally that began in This autumn of final yr. The inventory hit backside on October 11 when it posted a 52-weeks low at $5.36, solely to show it round from that time on. The inventory bought as excessive as $8.67 on February 2, which represents a achieve of 61.7% in lower than 4 months. For the yr, the inventory has gained 26.7% YTD. Compared, the iShares PHLX Semiconductor ETF (SOXX) has gained 20% YTD and the SPDR S&P 500 ETF (SPY) has gained 6.7% YTD.

UMC has outperformed most semiconductor shares. As well as, the inventory seems to be in an uptrend. Word the upper lows and better highs in place for the reason that October low, which will be related to kind ascending trendlines which are working parallel to 1 one other. The inventory appears to be in an ascending channel, a bullish chart sample that might encourage further patrons to step in. The development is evident and it’s pointing up.

Nevertheless, it’s additionally price noting that the inventory has stalled in current weeks after posting the 2023 excessive on February 2. Granted, the inventory was overbought and due for a breather. However, the inventory appears to be having issues getting by the $8.25-8.75 area, which could not be a coincidence since this occurs to be the identical area the place the inventory beforehand topped out at $8.53 on June 8, 2022. That is simply $0.14 away from the 2023 excessive of $8.67 set on February 2.

The inventory appears to have encountered resistance. The inventory can be on the higher sure of the channel, which suggests the inventory might should make a visit again to the decrease sure of the channel earlier than it might take one other stab at new highs for the yr. It’s doable the inventory continues increased, however the path of least resistance within the close to time period is for the inventory to show south. Some might wish to take into account decreasing their publicity, particularly in the event that they managed to get in on the current lows and are sitting on substantial good points after the large rally.

The inventory has managed to beat headwinds

The inventory’s outperformance is much more exceptional if one takes under consideration the circumstances wherein the rally passed off. The inventory has, as an illustration, seemed previous the latest earnings report, which dissatisfied by lacking estimates for the highest and the underside line. The numbers additionally make it clear the foundry trade is within the midst of a downturn.

Nonetheless, UMC ended FY2022 with strong headline numbers. FY2022 income elevated by 30.8% YoY to NTD278,705M or $9,078M utilizing an change price of 1:30.70 for the U.S. greenback. EPS elevated by 55.1% YoY to NTD7.09 or $0.231, which interprets to $1.155 per ADS. UMC has room for a dividend pretty much as good because the one final yr. UMC completed FY2022 with money and money equivalents totaling NTD173.82B or $5.66B. All in all, FY2022 was not a nasty yr for UMC with main good points made.

(Unit: M NTD besides EPS)

FY2022

FY2021

YoY

Income

278,705

213,011

30.8%

Gross margin

45.1%

33.8%

1130bps

Working margin

37.4%

24.3%

1310bps

Working earnings

104,292

51,686

101.8%

Web earnings

87,198

55,780

56.3%

EPS

7.09

4.57

55.1%

Click on to enlarge

Supply: UMC

Nevertheless, UMC ended FY2022 on a comfortable word and there may be purpose to imagine there may be extra weak point forward. This autumn income nonetheless elevated by 14.8% YoY, but it surely additionally decreased by 10% QoQ to NTD67,836M or $2,210M. Equally, EPS declined by 29.7% QoQ, even when it elevated by 18.5% YoY to NTD1.54 or $0.05, which interprets to $0.251 per ADS. This autumn gross and working margins improved YoY, however they took a step again from the highs reached within the previous quarter. The tide has turned and the query is when it can come again. The desk under exhibits the numbers for This autumn FY2022.

(Unit: M NTD besides EPS)

This autumn FY2022

Q3 FY2022

This autumn FY2021

QoQ

YoY

Income

67,836

75,392

59,100

(10.0%)

14.8%

Gross margin

42.9%

47.3%

39.1%

(440bps)

380bps

Working margin

34.8%

40.0%

29.8%

(520bps)

500bps

Working earnings

23,637

30,157

17,616

(21.6%)

34.2%

Web earnings

19,068

26,996

15,949

(29.4%)

19.6%

EPS

1.54

2.19

1.30

(29.7%)

18.5%

Click on to enlarge

The sequential decline was pushed by a 14.8% QoQ decline in wafers shipped to 2,213K 8-inch equal, despite the fact that UMC elevated capability to 2,543K, which resulted in a 90% utilization price. The final time UMC didn’t end with a 100+% utilization price was This autumn FY2020 when the speed was 99%, which implies a streak of seven quarters was damaged. Moreover, the forecast sees utilization dropping even additional to 70% with wafer shipments dropping within the excessive teenagers. From the This autumn earnings name:

“Now let’s transfer on to the primary quarter 2023 steering. Our wafer cargo will decline by excessive teenagers proportion vary. ASP in U.S. will stay flat. Please word that we anticipate a 3% to 4% adversarial influence on international change on income. Gross revenue margins will likely be within the mid 30% vary. Capability utilization price will likely be roughly 70%. Our 2023 money based mostly CapEx will likely be budgeted at $3 billion.”

A transcript of the This autumn FY2022 earnings name will be discovered right here.

Nevertheless, UMC managed to offset the weak outcomes by calling for a rebound within the second half of 2023. The trough will likely be in Q2, if not in Q1.

“For the 2023 outlook. Nicely, I imply, given the cyclical nature of the semi trade, there is no such thing as a one which’s immune from the tip market downturns. Whereas we have been in a position to mitigate our loading within the second half of our 2022 amidst the downturn, because of the expansion in our auto enterprise maintain our enterprise momentum and which I additionally touched and search about 82% year-over-year. However for the primary half of 2023, we do foresee a continued softened demand in smartphone PC client market that can proceed for the stock digestion purpose. In the meantime, the stock digestion will proceed to be our first precedence. However, we anticipate the primary half, if not, the Q1 would be the trough.”

This outlook is in keeping with these of others. For instance, TSMC (TSM), the main foundry, has additionally known as for a rebound in demand in H2 2023 with the underside in H1. Nonetheless, UMC expects a decline within the lows teenagers in FY2023 income. Consensus estimates predict UMC will earn $0.71-0.81 on income of $7.47-8.43B in FY2023, a YoY decline of 34.8% and 12.2%, respectively, on the midpoint.

Valuations favor UMC

Valuations are one other issue that seemingly helped UMC within the current rally. UMC compares fairly nicely by way of multiples towards its predominant rivals within the foundry market, which embody TSM and GlobalFoundries (GFS). Typically, multiples for UMC are considerably decrease. However, multiples have gone up as they was once a lot decrease not that way back earlier than the current rally within the inventory.

UMC

GFS

TSM

Market cap

$21.04B

$35.21B

$468.01B

Enterprise worth

$17.04B

$34.38B

$445.06B

Income (“ttm”)

$9,066.2M

$7,854.1M

$73,644.0M

EBITDA

$4,829.4M

$2,583.4M

$50,698.8M

Trailing GAAP P/E

7.30

42.48

14.15

Ahead GAAP P/E

11.00

24.61

16.89

PEG ratio

0.13

N/A

0.20

P/S

2.28

4.39

6.35

P/B

1.91

3.89

4.88

EV/gross sales

1.88

4.38

6.04

Trailing EV/EBITDA

3.53

13.31

8.78

Ahead EV/EBITDA

4.82

11.00

8.56

Click on to enlarge

Supply: SeekingAlpha

Fed coverage is the wild card for UMC

An outlook calling for a restoration in demand and multiples has helped. Nevertheless, the largest issue that might decide the highway forward for the inventory is Fed coverage. It’s no coincidence that semis have been again in vogue ever since inflation has come down, elevating expectations of a Fed pivot. The market expects a much less restrictive coverage from the Fed and semis have benefited from patrons positioning themselves accordingly.

But when say inflation seems to be extra persistent than thought, the present rally in shares might simply get snuffed out by the identical Federal Reserve. The market has been trying previous the truth that earnings have been weak these days for a lot of semis, UMC included, in anticipation of higher occasions forward, however these expectations may very well be misplaced.

The market has come to the concept it is aware of what the Fed will do in 2023, however what the Fed truly does could also be one thing else completely. The Fed has been a tailwind in current months, but when it turns into the headwind that it was for many of 2022, UMC might simply flip south as soon as extra, simply because it didn’t that way back.

Investor takeaways

It’s tempting to go lengthy UMC with the way in which the inventory has rallied in current months and the development within the inventory pointing to increased costs, however I’d nonetheless not be a purchaser of UMC. UMC has rallied together with different semis because of perceptions of a Fed pivot, along with a bottoming within the semiconductor trade within the close to time period. This has led to the market trying previous the weak point within the quarterly numbers.

Nevertheless, each might take quite a bit longer to get right here. The present downturn within the semiconductor market might last more than anticipated. Latest trade forecasts have turned out to be too optimistic and that may very well be the case as soon as once more. Equally, perceptions of what the Fed will do is probably not right. Charges might should go even increased to convey inflation actually underneath management. If each will not be there, the market might come to the belief that earnings have been going within the incorrect route for a lot of firms, UMC included.

The charts depart open the potential for increased costs down the highway, however within the brief time period, the inventory is more than likely heading decrease. The inventory appears to be in an uptrend, however that doesn’t imply the inventory can not right, not with resistance in the way in which and the inventory on the higher vary of the channel. Nothing is ready in stone, however the odds favor a transfer again to the decrease vary of the channel.

Backside line, whereas the rally within the final 4 months or so has been spectacular, it’s additionally constructed on a shaky basis. So long as the Fed comes by and the semiconductor market begins to enhance within the coming months, the rally has an opportunity to proceed. Those that bought in just lately will likely be rewarded and those who stayed on the sidelines may have missed out. But when they don’t, not shopping for the rally might become the suitable transfer in any case.