Hsinchu City, Taiwan-based semiconductor foundry United Microelectronics Corporation (UMC) reported a 3.3% year-over-year rise in net sales for December despite high inflation and soft demand. Its net sales for 2022 increased 30.8% to 278.70 million.

Although it missed the consensus EPS estimate in the third quarter by 5.2%, its revenue was 3.9% above the estimate. Its gross margin in the third quarter came in at 47.3%, while its operating margin came in at 40%.

In the third quarter ended September 30, 2022, revenue from Asia-Pacific declined to 62%, compared to 65% in the year-ago period. On the other hand, revenue from North America accounted for 23%, compared to 22% in the prior-year quarter. UMC’s quarterly capacity rose 6.5% year-over-year to 2,539K, and the overall utilization rate remained above 100%.

UMC’s co-President Jason Wang said, “In the third quarter, our results benefitted from product mix optimization and a more favorable exchange rate, while fab capacity remained fully utilized. Despite softening demand in consumer end markets, strengths in certain wireless communications areas drove further expansion in our 22/28nm business, which accounted for 25% of overall third-quarter revenue and lifted wafer average selling price.”

UMC expects its wafer shipments to decline by approximately 10% in the fourth quarter. Its gross profit margin is expected to be in the low-40% range, and capacity utilization will remain at 90%. Its ASP in USD is expected to remain flat.

Wang said, “Moving into the fourth quarter, we expect to face headwinds amid demand weakness, impacted by factors including the inflationary environment and Ukraine war. While UMC will not be immune to the inventory correction affecting the industry, we will work closely with our customers as they adjust to current market conditions. At the same time, we will continue to deliver differentiated technology processes to enable customers’ product pipelines.”

“We have revised the company’s 2022 capital expenditure down to $3 billion, but our capacity expansions in Tainan and Singapore are still progressing as planned in order to meet long-term supply commitments. Despite near-term turbulences, the structural story of increasing silicon content driven by the rise of 5G, AIoT, and EV remains intact,” he added.

Moreover, UMC is trading at a discount to its peers. In terms of trailing-12-month non-GAAP P/E, UMC's 6.34x is 67.2% lower than the 19.34x industry average. Its trailing-12-month EV/Sales of 1.60x is 40.2% lower than the 2.67x industry average. Also, the stock's 3.01x trailing-12-month EV/EBITDA is 77% lower than the 13.13x industry average.

UMC has gained 38.8% in price over the past three months and 14.3% over the past six months to close the last trading session at $7.44. Wall Street analysts expect the stock to hit $9.90 in the near term, indicating a potential upside of 33.1%.

Here’s what could influence UMC’s performance in the upcoming months:

Robust Financials

UMC’s operating revenues increased 34.9% year-over-year to NT$75.39 billion ($2.47 billion) for the third quarter ended September 30, 2022. Its operating income grew 99.3% year-over-year to NT$30.17 billion ($990.66 million).

The company’s net income attributable to shareholders of the parent increased 54.6% year-over-year to NT$27 billion ($886.57 million). Also, its EPS came in at NT$2.19, representing an increase of 53.1% year-over-year.

Mixed Analyst Estimates

UMC’s EPS and revenue for fiscal 2022 are expected to increase 42.5% and 18.8% year-over-year to $1.18 and $9.14 billion, respectively. On the other hand, its EPS and revenue for fiscal 2023 are expected to decline 36.4% and 13% year-over-year to $0.75 and $7.93 billion, respectively.

High Profitability

In terms of the trailing-12-month net income margin, UMC’s 31.14% is 876% higher than the 3.19% industry average. Likewise, its 22.10% trailing-12-month levered FCF margin is 195.1% higher than the industry average of 7.49%.

Furthermore, the stock’s trailing-12-month Capex/Sales came in at 21.81%, compared to the industry average of 2.50%.

POWR Ratings Show Promise

UMC has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. UMC has an A grade for Value, in sync with its discounted valuation.

It has an A grade for Quality, consistent with its high profitability.

UMC is ranked #2 out of 93 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to access UMC’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

UMC is trading above its 50-day and 200-day moving averages of $6.96 and $7.17, respectively, indicating an uptrend. While demand is expected to remain soft due to the current macroeconomic headwinds, the company remains confident about its long-term growth prospects. Moreover, the company’s ongoing capacity expansions will help it meet the rising demand.

Given its robust financials and high profitability, the stock looks pretty cheap at the current price level.

How Does United Microelectronics Corporation (UMC) Stack up Against Its Peers?

UMC has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Semiconductor & Wireless Chip industry with an A (Strong Buy) or B (Buy) rating: Renesas Electronics Corporation (RNECF), Xperi Inc. (XPER), and Photronics, Inc. (PLAB).

UMC shares fell $0.04 (-0.54%) in premarket trading Thursday. Year-to-date, UMC has gained 13.94%, versus a 3.42% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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