Wafer Worries Weighing On Shin-Etsu

When the stock of a well-run company that you’ve long admired gets to a point where the apparent annualized returns are in the double-digits, it’s a good time to refresh your due diligence. Such is the case with Shin-Etsu (OTCPK:SHECY) (4063.T), where management continues to execute at a high level and where the company’s core markets are healthy, but where recent fears relating to the semiconductor market seem to be having a disproportionate impact on the share price.

The risk of a sudden drop in semiconductor demand is not trivial, as Shin-Etsu’s wafer business generates about 30% of total operating profits today, but I also don’t think it’s particularly likely given the tight current supply situation and the relatively constrained capacity expansion plans across the industry. I also don’t think my modeling assumptions are all that ambitious, as I’m looking for long-term revenue growth of 4% and high single-digit FCF growth from a company exposed to global construction growth, semiconductor production, and EVs.

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Wafer Worries Weighing On Shin-Etsu

ON Semiconductor Performing Well As The Cycle Ages

Like a lot of chip companies, ON Semiconductor (ON) has seen its share price slide over the last few months as investors have become more worried about lengthening lead times and the prospect that the cycle is peaking. I wouldn’t advise ignoring that risk (it’s really never different this time, and semiconductor demand is still cyclical), but ON’s leverage to growth opportunities in auto and industrial end-markets and ongoing synergies from the Fairchild deal can still support a worthwhile outlook. I’d also note that expectations aren’t exactly robust – mid single-digit free cash flow growth would be enough to support a higher share price.

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ON Semiconductor Performing Well As The Cycle Ages

Almost Everything Going Right For Shin-Etsu Chemical

When an uncommonly well-run company intersects with stronger than expected underlying end-markets, very good things can happen for the stock. Such has been the case for Shin-Etsu (OTCPK:SHECY), where strong results up and down the line have pushed the shares up another 25% or so from where they were when I last wrote about the company, even after a double-digit pullback from the January high.

I still lean positive on these shares. Although I fully expect the company's growth rate to slow from its recent trajectory, I believe the company's exposure to the strong PVC and wafer cycles as well as exposure to other growing specialty markets, biases the story in a favorable direction. Although the shares have enjoyed a very strong run since 2016, healthy end-markets should still support a high single-digit annual return at this point.

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Almost Everything Going Right For Shin-Etsu Chemical

SUMCO's Rocket Ride May Not Be Over Yet

In the world of silicon wafers, two companies stand apart – Shin-Etsu (OTCPK:SHECY) and SUMCO (OTCPK:SUOPY). These two Japanese companies control close to 60% of the market between them, and an even larger share of the most sophisticated and demanding wafer types. I wrote about Shin-Etsu here, and now, it is time to take a look at SUMCO – a company that is benefitting from strong wafer price increases and healthy volumes as fabs continue to ramp up production of memory and logic chips.

SUMCO has already enjoyed a strong run and the wafer sector is cyclical. Right now, the industry is going through a significant up-cycle, but capacity additions have been restrained, and the outlook for wafer pricing over the next few years is healthy. While a lot is already in the share price, I don’t think SUMCO’s potential is tapped out just yet.

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SUMCO's Rocket Ride May Not Be Over Yet

Shin-Etsu Chemical Leading Its Peers For Good Reasons

Large chemical companies with mid-teens operating margins aren't very common, but Japan's Shin-Etsu (OTCPK:SHECY) has managed it for some time and that has helped the stock outperform both the Nikkei and the S&P 500 over the last five years. With leading positions in PVC, silicones, and multiple markets serving the semiconductor space, I believe Shin-Etsu is looking at a relatively favorable revenue and margin outlook for at least the next few years.

With both the Tokyo-traded shares and the ADRs up around 70% over the last year, a lot of the positives about this company are in the stock. That said, the shares don't look particularly expensive on a DCF basis and improving conditions in the wafer market could drive some near-term upside. I'd rather see a better entry price, but Shin-Etsu's all-around quality argues for a spot on a watch list, and I wouldn't be in a rush to sell if I owned the shares.

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Shin-Etsu Chemical Leading Its Peers For Good Reasons

Big Differences Of Opinion On MEMC

An old rule of thumb says it is difficult to make any real money from names where the analysts are already all in agreement. The idea is that everybody already knows the story, and the only way to profit is to be contrarian (and right!). So, what should investors make of MEMC Electronic Materials (NYSE: WFR)? Analysts are all over the place on this name, and this seems like a classic case where an investor with better information (or a luckier guess) could make some real money.

Third Quarter Results - Better But Not Better Enough
In a vacuum, there would seem to be little wrong with the company's third quarter. Revenue rose 62% from last year and 12% from the Q2, as solar materials were up strongly and semiconductor materials demand was positive as well. Nevertheless, the company was about 6% shy of analyst estimates, and there is ample skepticism about the near-term outlook for demand in both semiconductors and solar energy.

The link below leads to the full piece:
http://stocks.investopedia.com/stock-analysis/2010/Big-Differences-Of-Opinion-On-MEMC-WFR-ENTG-CCMP-ATMI-RNWEY-SUOPY-STP1103.aspx