Intrinsic value of Taiwan Semiconductor Manufacturing ADR - TSM

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$32.08

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$32.08

 
Intrinsic value

$97.73

 
Up/down potential

+205%

 
Rating

str. buy

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of TSM stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 156.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  12.38
  28.80
  26.42
  24.28
  22.35
  20.62
  19.05
  17.65
  16.38
  15.25
  14.22
  13.30
  12.47
  11.72
  11.05
  10.44
  9.90
  9.41
  8.97
  8.57
  8.22
  7.89
  7.60
  7.34
  7.11
  6.90
  6.71
  6.54
  6.38
  6.25
  6.12
Revenue, $m
  30,475
  39,252
  49,622
  61,669
  75,453
  91,007
  108,348
  127,469
  148,353
  170,969
  195,282
  221,252
  248,839
  278,008
  308,727
  340,972
  374,729
  409,992
  446,765
  485,062
  524,910
  566,344
  609,410
  654,164
  700,671
  749,006
  799,254
  851,507
  905,867
  962,444
  1,021,355
Variable operating expenses, $m
 
  17,422
  22,020
  27,361
  33,472
  40,369
  48,057
  56,535
  65,794
  75,821
  86,601
  98,096
  110,327
  123,259
  136,879
  151,176
  166,142
  181,777
  198,081
  215,061
  232,728
  251,098
  270,192
  290,034
  310,654
  332,084
  354,363
  377,530
  401,631
  426,715
  452,835
Fixed operating expenses, $m
 
  5,037
  5,163
  5,292
  5,424
  5,560
  5,699
  5,841
  5,987
  6,137
  6,290
  6,448
  6,609
  6,774
  6,943
  7,117
  7,295
  7,477
  7,664
  7,856
  8,052
  8,253
  8,460
  8,671
  8,888
  9,110
  9,338
  9,571
  9,811
  10,056
  10,307
Total operating expenses, $m
  18,329
  22,459
  27,183
  32,653
  38,896
  45,929
  53,756
  62,376
  71,781
  81,958
  92,891
  104,544
  116,936
  130,033
  143,822
  158,293
  173,437
  189,254
  205,745
  222,917
  240,780
  259,351
  278,652
  298,705
  319,542
  341,194
  363,701
  387,101
  411,442
  436,771
  463,142
Operating income, $m
  12,146
  16,793
  22,439
  29,016
  36,556
  45,079
  54,592
  65,093
  76,572
  89,011
  102,391
  116,709
  131,903
  147,974
  164,904
  182,680
  201,292
  220,738
  241,020
  262,146
  284,131
  306,993
  330,758
  355,458
  381,129
  407,812
  435,553
  464,406
  494,425
  525,672
  558,213
EBITDA, $m
  19,342
  24,545
  32,234
  41,184
  51,439
  63,026
  75,956
  90,224
  105,816
  122,711
  140,881
  160,295
  180,925
  202,742
  225,723
  249,851
  275,113
  301,506
  329,033
  357,703
  387,538
  418,563
  450,812
  484,328
  519,161
  555,366
  593,006
  632,153
  672,881
  715,273
  759,420
Interest expense (income), $m
  106
  172
  303
  456
  635
  839
  1,070
  1,327
  1,610
  1,920
  2,255
  2,615
  3,000
  3,409
  3,842
  4,297
  4,775
  5,275
  5,798
  6,343
  6,910
  7,501
  8,115
  8,754
  9,417
  10,106
  10,823
  11,567
  12,342
  13,148
  13,986
Earnings before tax, $m
  12,408
  16,620
  22,137
  28,560
  35,921
  44,239
  53,522
  63,766
  74,961
  87,091
  100,136
  114,093
  128,903
  144,565
  161,063
  178,383
  196,517
  215,463
  235,222
  255,803
  277,220
  299,492
  322,643
  346,705
  371,712
  397,705
  424,731
  452,838
  482,083
  512,525
  544,227
Tax expense, $m
  1,659
  4,488
  5,977
  7,711
  9,699
  11,945
  14,451
  17,217
  20,240
  23,515
  27,037
  30,805
  34,804
  39,033
  43,487
  48,163
  53,060
  58,175
  63,510
  69,067
  74,849
  80,863
  87,114
  93,610
  100,362
  107,380
  114,677
  122,266
  130,162
  138,382
  146,941
Net income, $m
  10,746
  12,133
  16,160
  20,849
  26,222
  32,295
  39,071
  46,549
  54,722
  63,577
  73,099
  83,288
  94,099
  105,533
  117,576
  130,219
  143,457
  157,288
  171,712
  186,736
  202,371
  218,629
  235,529
  253,094
  271,350
  290,325
  310,053
  330,572
  351,921
  374,143
  397,285

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  20,448
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  60,648
  51,783
  65,465
  81,358
  99,542
  120,062
  142,939
  168,165
  195,716
  225,553
  257,628
  291,889
  328,284
  366,765
  407,291
  449,831
  494,366
  540,886
  589,399
  639,924
  692,494
  747,156
  803,971
  863,013
  924,368
  988,135
  1,054,425
  1,123,360
  1,195,075
  1,269,714
  1,347,434
Adjusted assets (=assets-cash), $m
  40,200
  51,783
  65,465
  81,358
  99,542
  120,062
  142,939
  168,165
  195,716
  225,553
  257,628
  291,889
  328,284
  366,765
  407,291
  449,831
  494,366
  540,886
  589,399
  639,924
  692,494
  747,156
  803,971
  863,013
  924,368
  988,135
  1,054,425
  1,123,360
  1,195,075
  1,269,714
  1,347,434
Revenue / Adjusted assets
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
  0.758
Average production assets, $m
  30,024
  38,663
  48,878
  60,744
  74,321
  89,642
  106,722
  125,557
  146,128
  168,405
  192,353
  217,933
  245,107
  273,838
  304,096
  335,858
  369,108
  403,842
  440,063
  477,787
  517,037
  557,849
  600,269
  644,351
  690,161
  737,771
  787,265
  838,735
  892,279
  948,007
  1,006,035
Working capital, $m
  16,058
  -1,688
  -2,134
  -2,652
  -3,244
  -3,913
  -4,659
  -5,481
  -6,379
  -7,352
  -8,397
  -9,514
  -10,700
  -11,954
  -13,275
  -14,662
  -16,113
  -17,630
  -19,211
  -20,858
  -22,571
  -24,353
  -26,205
  -28,129
  -30,129
  -32,207
  -34,368
  -36,615
  -38,952
  -41,385
  -43,918
Total debt, $m
  8,011
  8,648
  13,040
  18,142
  23,979
  30,566
  37,909
  46,007
  54,851
  64,429
  74,725
  85,722
  97,405
  109,758
  122,766
  136,422
  150,717
  165,651
  181,223
  197,442
  214,317
  231,863
  250,101
  269,053
  288,748
  309,217
  330,496
  352,625
  375,645
  399,604
  424,552
Total liabilities, $m
  15,985
  16,622
  21,014
  26,116
  31,953
  38,540
  45,883
  53,981
  62,825
  72,403
  82,699
  93,696
  105,379
  117,732
  130,740
  144,396
  158,691
  173,625
  189,197
  205,416
  222,291
  239,837
  258,075
  277,027
  296,722
  317,191
  338,470
  360,599
  383,619
  407,578
  432,526
Total equity, $m
  44,663
  35,161
  44,450
  55,242
  67,589
  81,522
  97,055
  114,184
  132,891
  153,151
  174,930
  198,193
  222,905
  249,033
  276,551
  305,435
  335,674
  367,262
  400,202
  434,508
  470,203
  507,319
  545,897
  585,986
  627,646
  670,944
  715,954
  762,762
  811,456
  862,136
  914,908
Total liabilities and equity, $m
  60,648
  51,783
  65,464
  81,358
  99,542
  120,062
  142,938
  168,165
  195,716
  225,554
  257,629
  291,889
  328,284
  366,765
  407,291
  449,831
  494,365
  540,887
  589,399
  639,924
  692,494
  747,156
  803,972
  863,013
  924,368
  988,135
  1,054,424
  1,123,361
  1,195,075
  1,269,714
  1,347,434
Debt-to-equity ratio
  0.179
  0.250
  0.290
  0.330
  0.350
  0.370
  0.390
  0.400
  0.410
  0.420
  0.430
  0.430
  0.440
  0.440
  0.440
  0.450
  0.450
  0.450
  0.450
  0.450
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
  0.460
Adjusted equity ratio
  0.649
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679
  0.679

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  10,746
  12,133
  16,160
  20,849
  26,222
  32,295
  39,071
  46,549
  54,722
  63,577
  73,099
  83,288
  94,099
  105,533
  117,576
  130,219
  143,457
  157,288
  171,712
  186,736
  202,371
  218,629
  235,529
  253,094
  271,350
  290,325
  310,053
  330,572
  351,921
  374,143
  397,285
Depreciation, amort., depletion, $m
  7,196
  7,752
  9,795
  12,168
  14,883
  17,948
  21,364
  25,131
  29,245
  33,700
  38,490
  43,587
  49,021
  54,768
  60,819
  67,172
  73,822
  80,768
  88,013
  95,557
  103,407
  111,570
  120,054
  128,870
  138,032
  147,554
  157,453
  167,747
  178,456
  189,601
  201,207
Funds from operations, $m
  15,394
  19,885
  25,955
  33,017
  41,106
  50,243
  60,435
  71,680
  83,967
  97,277
  111,589
  126,875
  143,121
  160,300
  178,395
  197,391
  217,279
  238,056
  259,725
  282,294
  305,778
  330,199
  355,583
  381,965
  409,382
  437,879
  467,506
  498,319
  530,376
  563,744
  598,492
Change in working capital, $m
  -1,961
  -377
  -446
  -518
  -593
  -669
  -746
  -822
  -898
  -973
  -1,045
  -1,117
  -1,186
  -1,254
  -1,321
  -1,387
  -1,452
  -1,516
  -1,581
  -1,647
  -1,713
  -1,782
  -1,852
  -1,924
  -2,000
  -2,078
  -2,161
  -2,247
  -2,337
  -2,433
  -2,533
Cash from operations, $m
  17,355
  22,592
  26,400
  33,535
  41,698
  50,911
  61,180
  72,502
  84,865
  98,249
  112,635
  127,991
  144,307
  161,554
  179,716
  198,777
  218,731
  239,573
  261,306
  283,941
  307,491
  331,980
  357,435
  383,889
  411,382
  439,958
  469,667
  500,566
  532,714
  566,177
  601,025
Maintenance CAPEX, $m
  0
  -6,005
  -7,733
  -9,776
  -12,149
  -14,864
  -17,928
  -21,344
  -25,111
  -29,226
  -33,681
  -38,471
  -43,587
  -49,021
  -54,768
  -60,819
  -67,172
  -73,822
  -80,768
  -88,013
  -95,557
  -103,407
  -111,570
  -120,054
  -128,870
  -138,032
  -147,554
  -157,453
  -167,747
  -178,456
  -189,601
New CAPEX, $m
  -10,709
  -8,639
  -10,215
  -11,867
  -13,576
  -15,321
  -17,080
  -18,835
  -20,571
  -22,277
  -23,948
  -25,580
  -27,173
  -28,731
  -30,258
  -31,762
  -33,251
  -34,734
  -36,221
  -37,723
  -39,250
  -40,812
  -42,420
  -44,082
  -45,809
  -47,610
  -49,494
  -51,469
  -53,545
  -55,728
  -58,028
Cash from investing activities, $m
  -12,713
  -14,644
  -17,948
  -21,643
  -25,725
  -30,185
  -35,008
  -40,179
  -45,682
  -51,503
  -57,629
  -64,051
  -70,760
  -77,752
  -85,026
  -92,581
  -100,423
  -108,556
  -116,989
  -125,736
  -134,807
  -144,219
  -153,990
  -164,136
  -174,679
  -185,642
  -197,048
  -208,922
  -221,292
  -234,184
  -247,629
Free cash flow, $m
  4,642
  7,948
  8,453
  11,893
  15,973
  20,726
  26,172
  32,323
  39,183
  46,747
  55,005
  63,941
  73,547
  83,802
  94,690
  106,196
  118,309
  131,017
  144,316
  158,205
  172,684
  187,761
  203,445
  219,753
  236,702
  254,315
  272,619
  291,643
  311,423
  331,993
  353,396
Issuance/(repayment) of debt, $m
  -145
  3,725
  4,392
  5,102
  5,837
  6,587
  7,343
  8,098
  8,844
  9,578
  10,296
  10,998
  11,683
  12,352
  13,009
  13,655
  14,295
  14,933
  15,573
  16,218
  16,875
  17,547
  18,238
  18,952
  19,695
  20,469
  21,279
  22,128
  23,020
  23,959
  24,948
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -71
  3,725
  4,392
  5,102
  5,837
  6,587
  7,343
  8,098
  8,844
  9,578
  10,296
  10,998
  11,683
  12,352
  13,009
  13,655
  14,295
  14,933
  15,573
  16,218
  16,875
  17,547
  18,238
  18,952
  19,695
  20,469
  21,279
  22,128
  23,020
  23,959
  24,948
Total cash flow (excl. dividends), $m
  4,313
  11,674
  12,845
  16,994
  21,810
  27,313
  33,515
  40,421
  48,027
  56,324
  65,302
  74,938
  85,230
  96,154
  107,699
  119,852
  132,604
  145,950
  159,889
  174,423
  189,559
  205,307
  221,683
  238,705
  256,397
  274,784
  293,898
  313,772
  334,443
  355,953
  378,344
Retained Cash Flow (-), $m
  -5,388
  -7,858
  -9,290
  -10,792
  -12,347
  -13,934
  -15,533
  -17,129
  -18,707
  -20,259
  -21,779
  -23,263
  -24,712
  -26,129
  -27,517
  -28,885
  -30,239
  -31,588
  -32,940
  -34,306
  -35,695
  -37,116
  -38,577
  -40,089
  -41,660
  -43,298
  -45,011
  -46,807
  -48,694
  -50,680
  -52,771
Prev. year cash balance distribution, $m
 
  17,360
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  21,176
  3,555
  6,203
  9,463
  13,379
  17,982
  23,292
  29,319
  36,065
  43,523
  51,675
  60,517
  70,026
  80,182
  90,967
  102,365
  114,363
  126,949
  140,117
  153,864
  168,192
  183,106
  198,616
  214,737
  231,486
  248,887
  266,965
  285,749
  305,273
  325,573
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  20,303
  3,255
  5,398
  7,792
  10,371
  13,050
  15,736
  18,325
  20,717
  22,817
  24,540
  25,825
  26,625
  26,918
  26,706
  26,013
  24,883
  23,379
  21,574
  19,551
  17,397
  15,193
  13,018
  10,937
  9,005
  7,261
  5,730
  4,421
  3,332
  2,451
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Taiwan Semiconductor Manufacturing Company Limited engages in the computer-aided design, manufacture, packaging, testing, sale, and marketing of integrated circuits, color filters, and other semiconductor devices. The company is also involved in manufacturing masks; and wholesaling and retailing electronic materials. In addition, it provides marketing and engineering support services; and customer service and technical support services, as well as sells electronic parts and solar related products. The company operates in Taiwan, the United States, Asia, Europe, the Middle East, Africa, and internationally. Taiwan Semiconductor Manufacturing Company Limited was founded in 1987 and is headquartered in Hsinchu, Taiwan.

FINANCIAL RATIOS  of  Taiwan Semiconductor Manufacturing ADR (TSM)

Valuation Ratios
P/E Ratio 77.4
Price to Sales 27.3
Price to Book 18.6
Price to Tangible Book
Price to Cash Flow 47.9
Price to Free Cash Flow 125.2
Growth Rates
Sales Growth Rate 12.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 27.2%
Cap. Spend. - 3 Yr. Gr. Rate 2.8%
Financial Strength
Quick Ratio 7
Current Ratio 0
LT Debt to Equity 11%
Total Debt to Equity 17.9%
Interest Coverage 118
Management Effectiveness
Return On Assets 19%
Ret/ On Assets - 3 Yr. Avg. 19.3%
Return On Total Capital 21.5%
Ret/ On T. Cap. - 3 Yr. Avg. 21.9%
Return On Equity 25.6%
Return On Equity - 3 Yr. Avg. 26.8%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 50.1%
Gross Margin - 3 Yr. Avg. 49.4%
EBITDA Margin 64.7%
EBITDA Margin - 3 Yr. Avg. 66.4%
Operating Margin 39.9%
Oper. Margin - 3 Yr. Avg. 38.8%
Pre-Tax Margin 40.7%
Pre-Tax Margin - 3 Yr. Avg. 40.6%
Net Profit Margin 35.3%
Net Profit Margin - 3 Yr. Avg. 35.4%
Effective Tax Rate 13.4%
Eff/ Tax Rate - 3 Yr. Avg. 12.9%
Payout Ratio 46.5%

TSM stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the TSM stock intrinsic value calculation we used $30475 million for the last fiscal year's total revenue generated by Taiwan Semiconductor Manufacturing ADR. The default revenue input number comes from 2016 income statement of Taiwan Semiconductor Manufacturing ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our TSM stock valuation model: a) initial revenue growth rate of 28.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for TSM is calculated based on our internal credit rating of Taiwan Semiconductor Manufacturing ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Taiwan Semiconductor Manufacturing ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of TSM stock the variable cost ratio is equal to 44.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $4914 million in the base year in the intrinsic value calculation for TSM stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Taiwan Semiconductor Manufacturing ADR.

Corporate tax rate of 27% is the nominal tax rate for Taiwan Semiconductor Manufacturing ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the TSM stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for TSM are equal to 98.5%.

Life of production assets of 4.2 years is the average useful life of capital assets used in Taiwan Semiconductor Manufacturing ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for TSM is equal to -4.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $44663 million for Taiwan Semiconductor Manufacturing ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 4888.55 million for Taiwan Semiconductor Manufacturing ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Taiwan Semiconductor Manufacturing ADR at the current share price and the inputted number of shares is $156.8 billion.


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Stock chart of TSM Financial statements of TSM
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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