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Does Tower Semiconductor Ltd. (NASDAQ:TSEM) Generate Enough Cash?

Walter Gay

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If you are currently a shareholder in Tower Semiconductor Ltd. (NASDAQ:TSEM), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine TSEM’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.

View our latest analysis for Tower Semiconductor

What is Tower Semiconductor’s cash yield?

Tower Semiconductor generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.

I will be analysing Tower Semiconductor’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Tower Semiconductor’s yield of 8.23% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Tower Semiconductor is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.

NASDAQGS:TSEM Net Worth February 5th 19

What’s the cash flow outlook for Tower Semiconductor?

Can TSEM improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 3.8%, increasing from its current levels of US$307m to US$318m. Although this seems relatively robust, breaking down into year-on-year growth rates, TSEM’s operating cash flow growth is expected to decline from a rate of 3.3% next year, to 0.5% in the following year. However, the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Its positive operating cash flow is a good sign of disciplined operational efficiency, leading to a yield in-line to the market portfolio. But if you factor in the higher risk of holding just Tower Semiconductor compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, I recommend you continue to research Tower Semiconductor to get a more holistic view of the company by looking at:

  1. Valuation: What is TSEM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TSEM is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Tower Semiconductor’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.