Omer regev
29/12/2016
Over the past few years, Tower has made dramatic improvements in the competitiveness of its specialty analog foundry technologies and manufacturing capabilities, while also strategically positioning it in high-growth niche markets with limited competition, where it could offer unique processes that its customers simply cannot do in-house.
As these improvements began to yield material market share gains and revenue growth, Tower also struck unique capacity expansion deals, where established long-term contracted customers are covering the entire fixed costs of new facilities; deals which truly may only be available in the analog industry. These deals have exponentially grown revenue, but more importantly established a lower-cost manufacturing model that limits downside risk, while providing continually expanding earnings and cash flow leverage.
Finally, as the two halves of the business model came together, revenue growth and low-cost manufacturing, the company has used its improving income and visibility to make steady and significant improvements to its long-term financial health and capital structure. These changes are evident in its growing cash balance and cash flow, its declining debt, and the elimination of many of its previously dilutive instruments, i.e. converts, warrants, and capital notes, which had historically kept many institutions from investing.
These changes have not only required an immense amount of work, but particularly because of the nature of the analog industry, have also taken several years to deliver obvious financial results. However, starting in FY15, Tower’s progress began to become more evident in its revenue growth, its cash flows and earnings, and have been building steady momentum since.
As of the end of 2016, Tower will have delivered 12 consecutive quarters of annual growth and seven consecutive quarters of sequential increases. While we expect some degree of normal seasonality in the March period, we look for the company to see at least double-digit revenue growth in 2017 and for earnings to increase over 30% next year.
With Tower still an evolving story, and many investors either new to the name, or hesitant because of the firm’s historic challenges, we believe the company has been in a “show me” scenario, where Tower was simply going to have to deliver a string of nearly inarguable results before many investors could be convinced to become involved.
In our opinion, the company has been doing just that for several quarters, and that recent results have been significant steps in the process of Tower earning a valuation that we believe its longterm fundamentals already support.
Particularly in analog, success often takes years to begin building momentum, but the positive of that patient process is that once established, share gains, cost structures, pricing, and cash flows can also ride the wave of that momentum for years, if properly managed. As we believe Tower is in the early stages of its success, which we only expect to become more obvious to investors in future quarters, we reiterate our Buy rating and our $28 target price, or 13.5x our FY17 EPS estimate of $2.08, and 14.8x our FY17 FCF estimate of $1.89.
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