Oppenheimer: Tower Semiconductor Has Legs, Multiples Set To Expand

• Tower Semiconductor Ltd. (USA) TSEM is up 11 percent year-to-date, while still trading meaningfully below their 52-week high of $18.29.
• Oppenheimer’s Shawn Simmons initiated coverage of the company with an Outperform rating and a price target of $20.
• Gaining access to fab capacity via deals and acquisitions, the company has achieved top-line growth and revenue stability, and is expected to generate healthy gross margins, Simmons stated.

Tower is a specialty foundry focusing on the RF/HPA, Power Management and Image Sensor markets. Tower inked an agreement in November with Panasonic to take a controlling stake in three of the latter’s fabs, creating a joint venture named TPSCo.

TPSCo boosted Tower Semiconductor’s capacity by $650-$700M per annum, contributing a steady revenue stream of about $360-$400M from Panasonic.

Analyst Shawn Simmons believes that Tower Semiconductor has “largely earmarked” the remaining capacity of about $300M with third-party deals. He expects third-party revenue to grow to $25M per quarter exiting 2016 and to about $50M per quarter exiting 2017.

Tower Semiconductor acquired an 8" San Antonio fab from Maxim Integrated Products Inc. MXIM, which is scheduled to close in early 1Q. Simmons expects this to help Tower Semiconductor alleviate capacity constraints longer term.

“With TSEM likely shifting to GAAP EPS reporting in 2016, we believe the overhang of mgmt's non-GAAP reconciliation could be lifted early next year,” the analyst wrote.

The company achieved healthy non-GAAP gross margin expansion through 2015, from 36 percent in 1Q to an estimated 40 percent in 4Q. Simmons expects non-GAAP GM to trend toward 50 percent over time.

“With a revenue run-rate of $1B and demand outstripping TSEM's supply, we see the company as a unique growth story with improving GMs/FCFs,” the Oppenheimer report noted.