Headquartered in Hsinchu City, Taiwan, United Microelectronics Corporation (UMC - Get Rating) is a semiconductor wafer foundry operator in the United States, Japan, Europe and internationally. As a global semiconductor chip shortage continues to adversely affect the electronics and automotive industries, among others, UMC has been working with its customers to reduce the capacity shortfall across the supply chain and increase its shipments significantly.

A strong demand for wafers from the consumer electronics industry has led to increased shipments of UMC’s 28nm wafers, which saw 18% sequential revenue growth in the last reported quarter.

The stock gained 271.3% in price over the past year and 11.3% over the past three months. The company’s commitment to achieve net zero carbon emissions by 2050 and build a sustainable supply chain may further strengthen its position in the market. In addition, UMC’s recent investment plans to expand its production capacity at Taiwan’s Tainan Science Park should position the company to capture new market opportunities in the coming months.

Click here to checkout our Semiconductor Industry Report for 2021

Here is what we think could shape UMC’s performance in the near term:

First Chip Foundry to Pledge Net Zero Emission

On June 1, UMC pledged to achieve  net zero carbon emissions by 2050, while obtaining admission to RE100 and setting progressive goals to use 100% renewable energy by 2050. The company becomes the first global semiconductor foundry to commit to net zero emission. Furthermore, it has joined hands with more than  500 suppliers, including Applied Materials, Inc (AMAT) and Tokyo Electron Limited (TOELY), to raise renewable energy to 20% of total power consumption by 2030 to support a sustainable supply chain. So, as governments worldwide continue to make efforts to fight climate change, UMC’s carbon reduction plans should position it to capitalize on the transition to a clean energy economy and set an example for its foundry peers.

Bullish Analyst Sentiment

A $0.14  consensus EPS estimate for the next quarter, ending September 2021, indicates a 180% improvement year-over-year. Furthermore,  its EPS is expected to rise 35.7% in the current year, 15.8% next year, and at the rate of 19.5% over the next five years. Analysts expect UMC’s revenue to rise 15.6% year-over-year to $7.18 billion in the current year.

Strategic Capacity Expansion Plan

On April 28, UMC announced plans to expand capacity  at its 300mm Fab 12A Phase 6 (P6) in Taiwan’s Tainan Science Park through a partnership with leading global customers. The customers are expected to pay  a deposit that will secure their chip supply over the long-term at a predetermined price and allow UMC to improve its profitability and focus on sustainable organic growth. This development should leverage UMC’s worldwide foundry market position and drive the company’s long-term growth.

Robust Financials

UMC’s operating revenues increased 11.4% year-over-year to NT$47.10 billion ($1.65 billion) in the first quarter, ended March 31, 2021. Its gross profit grew 53.8% from its year-ago value NT$12.49 billion ($0.45 billion), while its operating income expanded 123.2% from the prior-year quarter to NT$7.62 billion ($273.2 million). The company reported a 26.5% gross margin compared to 23.9% in the first quarter of 2020. Also, UMC’s net income increased 372.5% year-over-year to NT$10.43 billion ($366 million), while EPS grew 347.4% from its the year-ago value to NT$0.85 ($0.03).

POWR Ratings Reflect Rosy Prospects

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

Our proprietary rating system also evaluates each stock based on eight different categories. UMC has a B grade for Sentiment and Stability. The Sentiment grade is consistent with analysts’ expectations that its revenue and earnings will grow. Also, the Stability grade indicates that UMC is less volatile than  its peers.

Also, in terms of Value Grade, UMC has a B. The stock’s 16.67  P/E ratio, which is 37.7% lower than the 26.77 industry average, is in sync with this grade.

Click here to see the additional POWR Ratings for UMC (Quality, Growth, and Momentum).

The stock is ranked #1 of 99 stocks in the B-rated Semiconductor & Wireless Chip industry.

If you’re looking for other top-rated stocks in the same industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

As market demand for semiconductors continues to outpace supply, UMC’s increased wafer shipments and strategic investment plans to expand its  production capacity position it  to capture new opportunities in the market. Furthermore, the company’s commitment to net zero carbon emissions, at a time when countries worldwide  are seriously  pursuing efforts to shift to renewable energy, should further solidify its position in the wafer foundry market. So, we think the stock is a good bet now.

Click here to checkout our Semiconductor Industry Report for 2021

UMC shares were trading at $9.50 per share on Wednesday morning, down $0.08 (-0.84%). Year-to-date, UMC has gained 12.69%, versus a 15.02% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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