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From the Survey: STMicroelectronics
STMicroelectronics NV (STM) is a large multinational semiconductor company that designs, develops, manufactures and markets a broad range of semiconductor products. A few of its major customers are Apple (AAPL), Bosch, Cisco (CSCO - Free Cisco Stock Report), Nokia (NOK), Continental (UAL), Delta (DAL), Gemalto, and Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report). It also sells its products through distributors and retailers such as Arrow Electronics (ARW) and Avnet (AVT). The company’s competitors include Analog Devices (ADI), Atmel (ATML), Fairchild Semiconductor (FCS), Intel (INTC - Free Intel Stock Report), Linear Technology (LLTC), LSI (LSI), Microchip Technology (MCHP), National Semiconductor (NSM), ON Semiconductor (ONNN), Texas Instruments (TXN), and Taiwan Semiconductor (TSM), among others.
STMicroelectronics was formed in 1987 as the result of a merger between SGS Microelettronica and Thomson Semiconductors, and operated under the name SGS-Thomson Microelectronics until 1998. It is based out of offices in the Netherlands and Switzerland, and went public in December 1994, with simultaneous listings on Euronext and the New York Stock Exchange. In 1998, the company listed on the Borsa Italiana, and formally changed its name to STMicroelectronics.
STMicroelectronics produces a variety of semiconductor products, including discrete and standard commodity components, application-specific integrated circuits (“ASICs”), full custom and semi-custom devices, and application-specific standard products (“ASSPs”) for analog, digital, and mixed-signal applications. The company ‘s operations are organized into three segments: the Automotive, Consumer, Computer and Communication Infrastructure segment (41% of consolidated 2010 revenues), the Wireless (“Wireless”) segment (38%), and the Industrial and Multisegment Sector (21%). Between the three segments, the company produces semiconductor chips that are used in a wide variety of microelectronic applications, including automotive products, computer peripherals, telecommunications systems, consumer products, industrial automation, and control systems.
Looking at the cost structure, one should note the high level of research and development expenditures. Indeed, in 2010, R&D comprised nearly 25% of total costs. This can be explained by the highly competitive nature of the semiconductor industry. In today’s rapidly advancing technological landscape, it is essential for semiconductor companies (whose products are used in a majority of new electronics) to maintain a competitive edge in order that they not be made obsolete by tomorrow’s technology.
Another important component of the company’s operations is raw input prices. As the cost of silicon wafers, lead frames, and other components rises, it puts pressure on STMicroelectronics’ margins due to a several month lag in the pass through of these costs to its end customers. Importantly, this dependence on outside suppliers also makes the company susceptible to certain supply-chain disruptions. Indeed, the company experienced some headwinds over recent quarters from the recent 9.0 magnitude earthquake in Japan.
STMicroelectronics has a healthy balance sheet, with long-term debt amounting to just 11% of total capital as of the second quarter of 2011. Moreover, the company has a good deal of cash with which to finance small add-on acquisitions, and maintain generally strong liquidity. Finally, the company pays a well-covered dividend, with its stock currently yielding upwards of 6%.
Performance and Prospects
STMicroelectronics’ high degree of product and geographic diversification insulates it somewhat from regional pockets of economic weakness. Because it develops products for a wide range of market applications, the company is less dependent on any single product, application or end market. Geographically, the company derives its revenues from all around the world, with more than 90% coming from outside of the Americas.
Following an industrywide cyclical downturn in 2008 and 2009, STMicroelectronics’ top and bottom lines experienced a strong recovery through the first half of 2011. However, beginning in the second half, many of the company’s end-customers began to exercise caution given ongoing global economic uncertainty. Moreover, due to somewhat bloated inventory levels, the company has lost some if its pricing power of late. Indeed, several customers have pushed out or cancelled orders, reflected in recent declines in the company’s pipeline of new business.
Because the company (and semiconductor industry in general) is highly cyclical, it is heavily affected by global economic developments. As a result, the likelihood of an industrywide cyclical downturn is increasingly high in the short term. Nonetheless, underlying solid long-term fundamentals remain intact, and the stock’s short-term weakness could, in fact, prove to be an attractive buying opportunity. Should the company’s products remain competitive, it could well stand to benefit from the inevitable, long-term increase in global demand for semiconductors.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.