Cramer’s Favorite Semiconductor: SPIL

On CNBC’s Mad Money, Jim Cramer has become more bullish over the last few weeks, and last week he even proclaimed that the bottom had been set. While that would be great if he is right, we are not ready to shout from the roof tops just yet. Last night he talked about his favorite speculative way to play the recovery. He calls attention to a relatively small Taiwanese semiconductor company called Siliconware Precision Industries (SPIL).

“The numbers here are truly better than expected. Unlike many other stocks that are simply going higher because The Street has become more bullish about the market, SPIL’s accumulated first quarter sales are now expected to fall. They’re still going to fall 26% but that’s much better than the previous expectations of a 35% and the second quarter analysts think that SPIL sales could grow by 15% to 20% thanks to resumed orders for everything from handset chips, you know, semiconductors that go into cell phones, to graphics processors …

The recovery was really not anticipated by anyone, including the companies. And that’s precisely what makes SPIL and the other companies involved in the semiconductor food chain so attractive right in order to deal with the slowdown in business SPIL had taken a bunch of actions to cut costs, and these are moves that should really pay off now that we’re seeing a recovery in the semis. SPIL eliminated overtime pay. That should save roughly 180 million new Taiwan dollars, that’s on top of the head count reduction that the company put through in the fourth quarter. SPIL has also shut down unused production costs to minimize fixed costs.

It’s done everything right. Now it’s a leaner, meaner company that can package and test more chips for less money. Then there’s the dividend. Got to love big dividends. SPIL intends to pay out a massive dividend this year, bring the yield to 8.5%, a payoff I think is marathon man-like as in it will only eat up about a third of the cash the company has on hand.” CNBC’s Mad Money on Monday, April 06, 2009.

Siliconware Precision IndustriesCramer is getting pretty bullish off late, but at least he is specifically stating that this stock is a speculative play on a recovery. At the current price level, we have an Ockham valuation stance of Fairly Valued. Our methodology is not built for speculating, rather it is geared towards investing. The stock is was undervalued by our methodology when the market was bottoming in early March. Just in the last month the stock has appreciated 37%, and we no longer consider it Undervalued. The fact that the company has made very appropriate cost and wage cuts has, in our opinion, has largely been priced in. Furthermore, the stock is enjoying the “Cramer bounce” today up 6%, while the market indexes are down. Cramer has many devoted viewers, and you can often observe that if Cramer spends any length of time on a stock that normally does not get huge volume, he can literally move the market. On Tuesday morning, it was the most searched on stock on Google Finance. But be careful when trying to ride that wave, it often will swing to the other side in the next few days.

While the overall sales growth picture for SPIL is attractive, we think that it is simply too expensive right now. In this case, we will leave the speculating to those that like to chase momentum.

Cramer’s Favorite Semiconductor: SPIL

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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