Buying stocks that are trading at a level below, or slightly above, tangible book value almost always works out better than purchasing companies selling far above physical asset value. When buying a business, usually, you can be fairly certain you are getting a good price when you do not pay much more than the tangible value of its assets.
I am going to be taking a look at three semiconductor companies. Sadly, none of them are trading below book value. But none trade at a level extremely far above book value either.
Headquartered in Singapore, Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) is the cheapest of the three relative to its book value. Hailing from the Netherlands, ASM International NV (ADR) (NASDAQ:ASMI) is more expensive, on a book value basis, than Kulicke and Soffa Industries Inc. (NASDAQ:KLIC), although it does have a lower price to book ratio than the king of the semiconductor industry Intel Corporation (NASDAQ:INTC). (It should be noted that Intel holds a 4% stake in ASM International NV (ADR) (NASDAQ:ASMI).)
How these companies differ
While all three companies are in the semiconductor industry, product lines are not exactly the same. Semiconductors are used in a variety of applications, for example light emitting diodes and transistors.
Intel Corporation (NASDAQ:INTC) is primarily known for, and generates most of its revenue from, selling microprocessors, or the “brains” of a computer. On the other hand Kulicke and Soffa Industries Inc. (NASDAQ:KLIC), and ASM International NV (ADR) (NASDAQ:ASMI) primarily manufacture components of semiconductor devices (a microprocessor is an example of such a device) and sell them to companies that produce semiconductor devices (like Intel).
Comparing balance sheets
The following table includes figures that can be found on, or derived from, each of these company’s balance sheet. For context I have also included market capitalization.
| ASMI | INTC | KLIC | |
| Market Cap | $2B | $115.1B | $834.5M |
| Price/Tangible Book Ratio | 2.27 | 3.14 | 1.4 |
| Working Capital | $879M | $17.66B | $613.34M |
| Shareholder’s Equity | $2.74B | $53.84B | $661.2M |
| Total Debt/Equity Ratio | .11 | .26 | 0 |
Intel Corporation (NASDAQ:INTC)’s massive market cap indicates that, out of these three companies, it is best equipped to handle financial turbulence. None of these companies has a problem with leverage, all have adequate working capital and low levels of debt.
Purely from a balance sheet perspective, Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) looks attractive to me. It has working capital equal to approximately 75% of its market cap (including $500 million in cash), the lowest price to book ratio of the three, and absolutely zero debt.
On the basis of balance sheet value this company looks cheap, but we can’t make a decision on that alone. We have to know if the company’s relatively cheap balance sheet valuation is accompanied by a decent amount of profit generating power. To determine if that is the case, let’s take a look at the income statement.
Income statement examination
I have, again, condensed what I believe to be salient bits of information into a table. The following table will outline key statistics, relating to the past record, on each company’s revenue and net income.
| ASMI | INTC | KLIC | |
| Revenue 2012 | $1.42B | $53.34B | $791M |
| Revenue 2010-2012 | $1.43B | $51.32B | $794.74M |
| Revenue 2000-2002 | $671.7M | $29B | $639.65M |
| Net Income 2012 | $50M | $11B | $160.58M |
| Net Income 2010-2012 | $260.53M | $11.8B | $143.44 |
| Net Income 2000-2002 | $70.51M | $4.98B | ($57.25M) |
*3 year periods represent average figures
ASM International NV (ADR) (NASDAQ:ASMI) didn’t exactly perform all that well during the year 2012, but looking too much into results from just one year can be dangerous. Although personally, I’m not all that interested in ASM International NV (ADR) (NASDAQ:ASMI) when the story over at Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) looks so much better.
Granted Kulicke and Soffa Industries Inc. (NASDAQ:KLIC) has had its share of troubles staying in the black. The company posted losses in 2009, 2008, 2005 and 2003. However, results from the last three years have been impressive, with the company generating nearly half its market cap in net income in that period.
Intel Corporation (NASDAQ:INTC) has delivered solid results year in and year out, the kind of performance you would expect from the top dog in the semiconductor industry.
Final Foolish thoughts
Here we have three companies in the semiconductor industry. An initial examination of each one’s balance sheet told us a few things. None carry excessive amounts of debt. And Kulicke and Soffa, with its 1.4 price to book ratio and nearly $500 million in cash, is the cheapest of the three relative to balance sheet value.
A look at the income statements showed us that Kulicke and Soffa may have had problems generating profits in the past, but no more. If the company generates net income in the future on par with results from the past three years, an investment will have proved shrewd.
In conclusion, Intel Corporation (NASDAQ:INTC) is probably the best choice among these three for investors whose chief concern is freedom from worry. The king of the semiconductor industry isn’t that expensive right now. But for investors looking to score big gains, and willing to stomach more risk, I recommend Kulicke and Soffa. Not that ASM International NV (ADR) (NASDAQ:ASMI) seems like a poor investment, Kulicke and Soffa just seems better.
Fool blogger Ryan Palmer has no position in any of the stocks mentioned. The Motley Fool recommends and owns shares of Intel. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Singaporean Semiconductor Stock For Sale! originally appeared on Fool.com is written by Ryan Palmer.
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