Tell someone that Magnachip Semiconductor Corp (MX) had a strong year in 2015 and you’ll probably get a look that says something to the effect of “Are you daft?” The stock is off over 70% from the start of 2015, taking a huge 40% dip in early February after having to revise years of revenue data downward and then losing an additional 35% or so from there despite a surge over the summer.
However, a closer look at the company gives plenty of reason to consider it more closely, especially when you consider the current price. Magnachip is in an extremely lucrative, fast-growing industry and appears to have put the worst behind it in terms of its past accounting problems, meaning there’s a real chance those investing today could be getting a steep discount on the company’s potential long-term valuation.
Magnachip’s Stock Had a Rough 2015
The Korea-based Magnachip is a semiconductor company that makes a variety of chips necessary to a variety of electronics, including HD displays, mobile devices, and a variety of sensors. The company had been a strong stock throughout 2012 and 2013, gaining more than 150% over that period.
However, things started to run into problems in 2014 when it became clear that the company’s accounting had come up lacking. Magnachip was forced to go through a painful audit that ultimately saw it restate all its revenue numbers since going public in 2011. The market reaction was swift and painful, shedding some 40% of its value when the new results were reported in February.
The stock recovered during the summer, nearly doubling in value through mid-August, only to suffer another downturn and swoon that has shares trading at $3.86 a piece, well below the $5.00 a share level things bottomed out at in March of last year.
Reasons for Hope
So the news from 2015 is largely pretty bad...that’s impossible to deny. However, as is frequently the case, a bad year for the price of a stock can frequently create an opportunity provided the company underlying it remains strong. That may or may not be the case for Magnachip, but there are plenty of factors that would seem to indicate its current price under $4.00 a share could be an attractive one.
For starters, the company’s price to sales ratio remains pretty attractive at 0.20, as does its PEG ratio of just 0.36. However, the most promising sign is likely the strong return on equity (ROE) for the company.
There’s also the segment it’s in to consider, as well. Operating in the semiconductor business is essentially working at the heart of the rapidly growing tech industry. The rapid growth of consumer products like smart phones, tablets, televisions, and more will likely mean that demand is strong for Magnachip’s products well into the future. Total revenues for the segment have been growing at a fairly steady 20% clip since bouncing back from a dip during the housing crisis.
It’s also worth noting that the industry continues to experience a lot of consolidation, making a smaller player like Magnachip that appears to be undervalued at the moment a prime buyout candidate. Rank speculations about companies getting purchased is rarely all that helpful, but it’s a consideration that provides some buffer against falling share prices. At a certain point, it seems likely that Magnachip’s valuation becomes pretty appealing to its competitors and could prompt a move.
Analysts and Hedge Funds Are Convinced Even if the Rest of the Market Isn’t
Of course, most of this could just as easily point towards a value trap where the only thing making the stock appealing is the fact that its price keeps falling. The risk is certainly there that one might be trying to catch a falling knife. However, the smart money appears to be bullish on Magnachip, at least at its current price.
Topeka Capital Markets, an analyst firm covering Magnachip, has the price target at $8. That’s well below the previous targets from 2013 that were typically in the mid-twenties, but it’s also more than double the current price.
The picture gets even more interesting when you look at the increased interest among hedge funds. The most recent set of 13F filings showed that two new funds had bought a stake in Magnachip, bringing the total number to 21. This includes the investment firm Pleasant Lake which was ready to buy the company outright for $346 million in August and increased its stake to just under 10% over the last year.
A company in a growing industry that has seen shares take a huge hit but has institutional buyers starting to show interest? That narrative can go either way, but it does tend to indicate a relatively strong company that’s getting smart money interest after its price has taken a hit.
Future is Murky for Magnachip, but the Potential for Big Returns Remains
Ultimately, there’s no sure way of knowing which direction Magnachip will swing. Certainly, declining revenue numbers and losses in recent years are not good signs. However, the company’s core operations don’t appear to have fallen so far behind that it would warrant the sort of massive devaluation the company has suffered so far.
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