Like a Swiss Clock

Rapid technological advancement and a growing appetite for innovation change the world we live in, as well as the investment landscape. Thus, the breakneck advance of changes in the automotive industry is not altering only the way we drive, but also adds myriad investment opportunities – with the automakers, and with those that help them evolve, such as the producers of cutting-edge semiconductors.

As the automotive industry undergoes a profound transformation with the rise of Electric Vehicles (EVs) and autonomous driving, the chipmakers find themselves at the forefront. Their cutting-edge semiconductor solutions power the brains and brawn of tomorrow’s vehicles, making them smarter, safer, and more efficient.

One group of chipmakers deserves special attention: Integrated Device Manufacturers. These are the companies that hold total control over the semiconductor value chain: they design, develop, produce, and package semiconductors in accordance with the specific needs of their customers. This is in contrast with fabless chipmakers, who only design the chips, and sometimes encounter difficulties in controlling the production and supply; and with the foundries, who are basically just production lines for semiconductors.

To control all spheres of chip manufacturing, Integrated Device Manufacturers need to be large, and have ample means for R&D, as well as for physical manufacturing. As they grow into giants, economies of scale allows for higher efficiency, profitability, and resilience. Their diversification across geographies, customers, and various end-uses further fortifies the investment case. In times of economic uncertainty or downturns in specific industries, the broad spectrum of their offerings acts as a safeguard, mitigating the impact of market volatility and economic fluctuations. On the other hand, when the economic outlook brightens, their involvement in diverse sectors, including automotive, consumer electronics, industrial applications, and more, allows them to capitalize on multiple growth avenues simultaneously.

This adaptability and ability to navigate through various economic scenarios solidify their position as reliable and attractive long-term investments, making them an enticing prospect for discerning investors.

Today, we are adding one such company to our Smart Investor holdings. But first, let us delve into a short update on the economy, markets, and Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days:

  • Later today, we will receive a report on August’s Consumer Price Index (CPI), one of the two key inflation measures (the second one is the Personal Consumption Expenditures, or PCE) used by policymakers, businesses, and investors.
  • On Thursday, we will see data on August’s Retail Sales, which measures the monetary equivalent of purchases made by consumers over a specified period. It helps the economists and policymakers to assess the level of consumer demand, one of the main driving forces behind GDP growth.
  • On Friday, we will get a preliminary report on September’s Consumer Sentiment Index, which reflects the level of confidence the consumers feel towards the economy. This Index is used by economists, analysts, and policymakers as a leading indicator, helping to unveil the near-future trends in consumer demand, which directly affects economic growth.

As for the stock calendar, the Q2 2023 earnings season for Smart Investor Portfolio companies is almost finished, with no reports scheduled to be published this week.

The ex-dividend dates for Teck Resources (TECK), Wesco International (WCC), Albemarle (ALB), Graphic Packaging (GPK), Taiwan Semiconductor (TSM), Amphenol (APH), and Broadcom (AVGO) are coming in the seven days before the next report.

Today, we are adding a European-based (U.S.-traded) semiconductor integrated manufacturing giant with stellar finances and exceptional profitability and efficiency metrics; its stock is undervalued, which provides investors with an opportunity buy into this long-term winner.

To make room for this valuable addition, we are letting go of the stock of a small-cap company, whose prospects are marred by macroeconomic factors.


New Addition: STMicroelectronics N.V. (STM)

STMicroelectronics N.V. (aka ST or STMicro) designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific. STM is one of the world’s largest semiconductor companies and the largest European semiconductor contract manufacturing and design company.

ST was incorporated in in 1987 by the merger of two government-owned semiconductor companies: Italian SGS Microelettronica, and French Thomson Semiconducteurs. Today, ST commands a market capitalization of $40.2 billion and an annual revenue of $16.1 billion. It has 80 offices in 35 countries, 14 production facilities around the globe, and a workforce of over 51,000 stationed in Europe, Americas, Mediterranean, and Asia. The company is headquartered in Geneva, Switzerland.

STMicroelectronics is an Integrated Device Manufacturer (IDM), meaning that it takes charge of all processes in producing semiconductors, covering fabless, foundry and back end processes. ST’s value chain covers all chip creation steps, from planning and design, through wafer fabrication, to assembly and testing, and then to sales and support. It serves automotive, industrial, personal electronics and communications equipment, and computers and peripherals markets.

Offering one of the industry’s broadest product portfolios, ST serves customers across the spectrum of electronics applications with innovative semiconductor solutions. STMicro’s products can be found in everyday items, such as electric toothbrushes or washing machines, as well as in the most advanced innovations, such as space technologies and data centers. ST’s technologies enable smarter mobility, more efficient power and energy management, and the wide-scale deployment of the Internet of Things (IoT) and connectivity.

The company commands three main product groups: (1) Automotive and Discrete Group, comprised of dedicated automotive integrated circuits (ICs), and discrete and power transistor products; (2) Analog, MEMS and Sensors Group, comprised of analog, smart power, MEMS sensors and actuators, and optical sensing solutions; Microcontrollers and Digital ICs Group, comprised of general-purpose microcontrollers and microprocessors, connected security products (e.g. embedded secured elements and NFC readers), memories (e.g. serial and page EEPROM) and RF and Communications products.

Although STMicroelectronics provides an extremely wide range of products and solutions, encompassing all electronics applications, it is best known for its Smart Mobility and IoT products. The Smart Mobility solutions support a wide range of automotive applications, from ADAS systems to active and passive safety systems, to in-car connectivity and infotainment. ST also provides leading-edge automotive solutions for Electromobility, Hybrid (HEV) and Battery Electric Vehicles (BEV). It is estimated that 80% of all innovations in the automotive industry today are enabled by electronics; STMicro’s products facilitate many of these innovations. The company’s IoT and connectivity segment offers numerous solutions, including wired and wireless connectivity products and technologies, solutions for secure IoT connectivity, and solutions for Artificial Neural Networks (ANNs).

The company serves more than 200,000 customers around the globe and works with thousands of partners to design and build products, solutions, and ecosystems that address their challenges and opportunities. ST’s largest customers include Apple (AAPL), which accounts for 17% of total revenues, Tesla (TSLA), Globalfoundries, Inc. (GFS), Continental (CON), HP (HPE), Mobileye (MBLY), Samsung (SSU), Seagate Technology (STX), Rivian Automotive (RIVN), and SpaceX.

In addition, STMicro has multiple partnership with companies such as BorgWarner (BWA), Micron (MU), Keysight Technologies (KEYS), Volkswagen (VOW), Airbus Group SE (AIR), and other prominent firms.

ST derives 45% of total annual revenues from its Automotive and Discrete Group, while the Analog, MEMS and Sensors Group is responsible for 22%, and Microcontrollers and Digital ICs Group – for 33% of revenue. The same balanced diversification can be seen in the company’s geographical revenue distribution: 34% comes from the Americas, 32% from Asia & Pacific, and 34% from EMEA.

Through decades of investment, ST has developed leading-edge chip-manufacturing and packaging technologies. Today, the company maintains and accelerates this tradition of innovation. ST is continuously investing in competitive proprietary technologies and in-house manufacturing complemented by outsourcing. STM devotes significant effort to R&D: 18% of its employees work in R&D on product design/development and technology. In 2022, the company spent more than 9% of its total revenue on R&D. STMicro owns a substantial patent library, containing 19,500 active and pending patents.

STMicroelectronics’ financial health is no less than perfect. As for ST’s solvency stature, its debt-to-equity ratio is a very low 18%; it has more cash than debt. Besides, debt-servicing costs are low, as the company’s credit rating is well within the investment grade segment at “BBB,” which means that credit rating agencies and investors view the company as carrying a very low risk.

With the current ratio of 2.7 and the quick ratio of 1.8, ST’s liquidity metrics also check all the boxes. The company boasts a Return on Equity (ROE) of 34% and a Return on Assets (ROA) of 21.6%, much higher than the sector’s averages. The company has a Return on Invested Capital (ROIC) of 21%.

STMicro’s outstanding profitability and efficiency are also reflected in its industry-beating operating margin of 30% and net profit margin of 27.5%. ST’s revenues rose at a CAGR of 14% in the past five years, while EPS grew at a CAGR of 35.3% over the same period.

Notably, the company’s revenue and earnings growth accelerated in the past three years to 22% and 69% CAGR rates, respectively. This fast clip led to a surge in analysts’ expectations, and in Q2 the company’s EPS was slightly below estimates – its first miss since the Covid-19 crisis – although it increased by over 15% year-on-year. On the other hand, net revenues exceeded estimates, rising 13% year-on-year.

As for the short-term revenue and earnings outlook, they are expected to grow at a slower pace this year due to the cyclicality of demand for semiconductors, as well as one-off factors such as expected lower demand from Apple, ST’s main customer, on the back of a decline in iPhone sales. On the other hand, the significant growth of the Automotive and Discrete sector’s revenues, coupled with low but steady growth in the income of the Microcontrollers & Digital ICs division, are expected to continue posing a counterweight to the revenue decline in the Analog, MEMS & Sensors segment.

Chipmakers as a whole have been experiencing sluggish demand this year, specifically for smartphone and other personal electronics chips. The world-largest chipmaker Taiwan Semiconductor (TSM) has said that even a surging demand for AI chips doesn’t compensate for this broad market weakness. However, the global automotive industry’s enhanced transition to digitalization and automatization, which demands advanced semiconductors, helps offset these headwinds. As the global leader in automotive semiconductor technology solutions, STMicroelectronics stands to profit from the advancement of electric, hybrid, and autonomous vehicles.

Thus, ST has lifted its Q3 2023 outlook, and said that the whole-year 2023 revenues are expected to grow by 8%-10% from 2022. The company’s wide diversification in terms of geographies, product suite, and customer base, plays an extremely important role in maintaining income growth.

STMicroelectronics’ stock has been publicly traded on the New York Stock Exchange and the Paris Stock Exchange since 1994, and on the Italian Stock Exchange since 1998.

Compared to its IDM competitors – Texas Instruments (TXN), Infineon Technologies (IFX), and Fujitsu (FJTSF) – ST’s stock performance was mostly stronger. In the past three years, the company’s stock rose 50%, while TXN clocked in an increase of 22%, IFX – 35%, and Fujitsu – 38%. In the past 12 months, the company’s shares rose 18%, versus TXN’s loss of 4%, IFX’s gain of 32%, and Fujitsu’s increase of 11%.

Despite the strong performance, STMicroelectronics’ shares are very attractively valued, at a TTM P/E of 8.5 and a Forward P/E of 10.2, representing a substantial discount not only to its U.S. counterparts (who usually carry premium valuations over overseas companies), but also to its global peers.

It should also be noted that, in addition to the stock appreciation, the company rewards its shareholders through dividends and buybacks. Although ST’s yield is low at 0.5%, the company has been consistently paying dividends since 1999; since 2010, it pays dividend on a quarterly basis, which is not typical for overseas firms. In addition, the company has a share repurchase program in place since 2021, which it plans to complete by 2024, purchasing shares to the total amount of $1.04 billion. In Q2 2023, the company repurchased shares totaling $86M.

TipRanks-scored top analysts foresee an average upside of 43% for the stock in the next 12 months. STMicroelectronics carries a “Perfect 10Smart Score rating on TipRanks with a “Strong Buy” recommendation:

In conclusion, STMicroelectronics N.V. is a highly diversified, well-managed, and effective company with a strong market share, pristine balance sheet, exceptional profitability, and stellar execution. Although the company’s stock may experience short-term volatility due to a downturn in one of its end-markets or along with the cyclicality of the semiconductor industry, it is well-positioned to overcome those obstacles and to continue growing its market share and profits. We view STM as a highly valuable long-term investment addition to the Smart Investor portfolio.


New Deletion: Wabash National (WNC)

Wabash National is an American industrial manufacturing company, which specializes in the design and production of semi-trailers, truck bodies, specialized commercial vehicles and liquid transportation systems.

The company was founded in 1985 and has been publicly traded since 1991. Despite its long operating history, the company hasn’t succeeded yet to break out of the “small cap” category; it has a market capitalization of $1 billion. Wabash belongs in the Industrial sector (Industry: Farm & Heavy Construction Machinery).

WNC’s financial health is robust, albeit far from perfect. Although the company has been working to reduce its debt load, its debt-to-equity ratio of 80.5% is considered high. While the debt is well-covered by operating cash flow and the interest payments are sufficiently covered by EBIT, a total debt of $400 million is quite a load for such a small company.

The company’s profitability metrics are mediocre: while its high ROA is skewed by its high debt levels, its ROE of 8.5% and ROIC of 9% are considered low. What’s more worrying, though, are the company’s low operating and net profit margins (11% and 7.8%, respectively) which leave it with little room to adjust to any adverse developments.

Basically, the main reason for selling the stock is the outlook for the economy as a whole, and for WNC’s industry in particular. While a recession in the U.S. is not the base case, there’s no doubt that the economy is slowing – and the slowdown impacts the smaller, domestically-oriented companies much more than their larger, more diversified peers.

In addition, the Federal Reserve has sharply increased its interest rates, and is now expected to keep them higher for longer. High interest rates hit small-caps harder: they don’t have access to bond markets and other sources of financing available to larger corporations, which means that they have to refinance their debts at a higher cost. For companies with large debt piles like WNC, this is an especially pressing issue.

Besides, a slowing economy and a high interest-rate environment portend trouble for Wabash end-customers’ industries, such as construction, transportation, logistics and distribution. Overall, the U.S. manufacturing sector has been in contraction for ten consecutive months; the softening in the economy in general doesn’t portend a swift turnaround. The recent increase in energy prices is also weighing on the sector.

Wabash National has been growing revenues at an average annual rate of 4.8% in the past five years, while EPS grew at a pace of 15%. The company’s earnings track record has been uneven, with two EPS misses out of the last eight quarters. Although the last four quarters showed blockbuster EPS growth, analysts have been cutting their earnings outlook for WNC, mostly on the basis of the macro factors weighing on prospects for truck and trailer demand.

The analyst coverage for WNC stock is sparce, with only two ratings (and no price targets) in recent months. However, one of the TipRanks-scored top analysts, Felix Boeschen from Raymond James, has opined on the stock, downgrading it to “Hold” from “Strong Buy.” The company’s stock surged to its all-time high in February this year, after which it fell 30%. Still, WNC’s gain for the last 12 months stands at 34%, an abnormal movement for an industrial company. Given this significant outperformance, as well as an uncertain outlook, muddled by macro factors, the stock may have further to fall. Therefore, we find it prudent to sell the stock at this point.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Alas, the Winners Club has lost its new member, ANET, whose gain since purchase has fallen below 30% threshold on the back of the recent declines in tech stocks. We certainly hope for its return, but meanwhile, the exclusive club’s ranks have shrunk to five stocks: GE, ORCL, TECK, AVGO, and CDW.

ANET is now again the closest runner-up with a gain of 24.8% since purchase. Will it be able to return, or will someone else outrun it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, September 20th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
STM Sep 13, 23 $43.90

New Portfolio Deletions

Ticker Date Added Current Price % Change
WNC Mar 15, 23 $21.21 -12.25%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $115.00 +105.80%
TECK Dec 8, 21 $41.96 +50.83%
ORCL Dec 21, 22 $109.61 +34.49%
AVGO Mar 22, 23 $844.52 +33.86%
CDW Jun 29, 22 $208.94 +32.17%
ANET Jun 21, 23 $189.03 +24.76%
WCC Sep 14, 22 $156.49 +16.64%
AMAT May 31, 23 $143.97 +8.00%
MOH May 3, 23 $321.02 +7.17%
ADM May 10, 23 $79.70 +6.78%
GD Dec 22, 21 $217.38 +6.68%
CI Jul 12, 23 $286.53 +6.64%
APD Apr 26, 23 $302.14 +5.76%
CHKP Jul 19, 23 $133.75 +5.05%
STLA Sep 6, 23 $19.03 +4.79%
DAL Feb 8, 23 $40.69 +3.17%
ACN Aug 16, 23 $314.89 +2.36%
PERI May 17, 23 $31.75 +1.57%
INMD Jun 28, 23 $36.65 -0.03%
VRTX Aug 2, 23 $346.55 -0.34%
UNH Apr 19, 23 $479.90 -1.30%
TDY Aug 30, 23 $408.85 -1.77%
JBL Jul 5, 23 $107.21 -1.81%
OXY Oct 5, 22 $66.43 -1.93%
APH Aug 9, 23 $86.60 -2.08%
ALG May 24, 23 $169.94 -2.99%
TSM Aug 23, 23 $90.48 -3.53%
EPD Jan 15, 20 $26.85 -7.16%
GPK Jul 26, 23 $22.04 -7.97%
DE:IFX Apr 5, 23 $32.17 -9.35%
LW Apr 13, 23 $97.62 -10.82%
ALB Jun 14, 23 $184.35 -18.57%


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