United Microelectronics Corporation (UMC - Get Rating), headquartered in Hsinchu city, Taiwan, operates as a semiconductor wafer foundry that offers circuit design, mask tooling, wafer fabrication, assembly, and testing services.

Nancy Pelosi’s recent visit to Taiwan has boosted the relationship between the United States and Taiwan. This ruffled some feathers in Beijing, and China conducted a large military drill near Taiwan. The event has also intensified the U.S.-China competition over semiconductor chips.

For a few key reasons, like the semiconductor design, equipment prowess, and wholesale customers being mostly U.S.-based, Taiwanese chip companies might be more likely to side with the United States.

UMC’s stock has declined 40.5% over the past year and 43% year-to-date to close its last trading session at $6.67. It is down 1.8% over the past month. However, Wedbush recently restated its ‘outperform’ rating on UMC shares.

On the other hand, according to the Semiconductor Industry Association (SIA), in the second quarter of 2022, global semiconductor sales grew 13.3% year-over-year and 0.5% sequentially to $152.50 billion.

Here are the factors that could affect UMC’s performance in the near term:

Solid Financials

For the fiscal second quarter of 2022, UMC’s operating revenues increased 41.5% year-over-year to NT$72.06 billion ($2.40 billion). Gross profit rose 110.4% from the prior-year quarter to NT$33.47 billion ($1.11 billion).

Net income attributable to shareholders of the parent and earnings per ADS improved 78.6% and 77.6% year-over-year.

Low Valuations

In terms of its forward P/E, UMC is trading at 5.62x, 75.3% lower than the industry average of 22.73x. The stock’s forward EV/EBITDA multiple of 2.71 is 79.1% lower than the industry average of 12.94. In terms of its forward EV/EBIT, it is trading at 3.91x, 76.4% lower than the industry average of 16.58x.

Broad Profit Margins

UMC’s trailing-12-month EBIT margin and net income margin of 33.05% and 29.76% are 329.1% and 600.6% higher than their respective industry averages of 7.70% and 4.25%.

Its trailing-12-month ROE, ROTC, and ROA of 28.51%, 15.58%, and 14.92% are 314.1%, 276%, and 442.9% higher than their respective industry averages of 6.88%, 4.14%, and 2.75%.

POWR Ratings Reflect Promising Prospects

UMC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

UMC has a Value grade of A in sync with its low valuations. The stock also has an A grade for Quality, consistent with its wide profitability margins.

In the 94-stock Semiconductor & Wireless Chip industry, it is ranked #2. The industry is rated B.

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

View all the top stocks in the Semiconductor & Wireless Chip industry here.

Bottom Line

Soaring China-Taiwan tensions could have a significant knock-off effect on the semiconductor industry. However, given UMC’s robust financials and stable profit margins, the stock seems poised to weather the challenges. Additionally, analysts expect its topline to grow 21.5% year-over-year for fiscal 2022.

How Does United Microelectronics Corporation (UMC) Stack Up Against its Peers?

While UMC has an overall POWR Rating of A, one might consider looking at its industry peers, STMicroelectronics N.V. (STM - Get Rating) and Semtech Corporation (SMTC - Get Rating), which also have an overall A (Strong Buy) rating.

UMC shares were trading at $6.87 per share on Wednesday morning, up $0.20 (+3.00%). Year-to-date, UMC has declined -41.28%, versus a -11.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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