Tower's share performance does not match its PR

Yaniv Pagot

Headlines provided by Tower give the impression that this is a manufacturer producing exceptional value for its investors.

The share price of Israel Corporation (TASE: ILCO) unit Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM) has fallen 62% over the past two years, directly continuing the agonizing path suffered by faithful investors for many years. The impressive performance of global markets generally, and the chipmaker sector in particular, only further emphasizes the major disappointment of the share's performance on Nasdaq and the Tel Aviv Stock Exchange (TASE), with a market cap of NIS 600 million.

The Migdal Ha'emek chipmaker is a veteran company in the Israeli publicly traded companies club and is traded on the Tel Aviv 100 Index. Those following the headlines provided by Tower in recent years but not informed about the share's performance, could mistakenly think that this is a manufacturer producing exceptional value for its investors.

The company has frequently reported impressive deals with global customers, mergers and acquisitions, and other activities during the seven years that Russell Ellwanger, a charismatic foreign CEO who consistently conveys the message that success is just around the corner. But the picture as reflected by the stock markets is very different.

Ellwanger was recently quoted as saying that he had no idea why the share price was plunging. We do have some idea. We don't pretend to understand the industry as deeply as Ellwanger, but the bottom line is that it doesn't look good.

Collapse of gross profit

While the company had record revenue of $639 million last year, apparently an excellent achievement, a look at the gross profit margin in the past three years reveals a collapse from 21% to 12%. The lethal combination of falling gross profit and a rise in operational expenditure resulted in the company reporting an operational loss in the record year just ended.

If the fall in operating profit was not enough, Tower's problematic capital structure meant it reported huge annual financial expenses of $60 million. The bottom line was that the company reported a net loss of NIS 70 million, joining consecutive and continuing losses.

It is not only investors in Tower's share that are not sure where the company is heading; bondholders are also concerned about their money. The company's Series 9 dollar bonds are traded at a yield to redemption of 13.5% in a world where appetite for risk is growing. In order to finance mounting losses, the company has been issuing more and more shares and instrument sconvertible to shares in recent years. Tower's share capital grew 37% between 2010 and 2012, so that veteran shareholders are suffering dilution after dilution in efforts to inject capital into the company.

In February 2011, Ellwanger was asked where he sees the company five year hence. His answer was that he believed the company would have annual revenue of more than $1 billion. With revenue on this scale, the company would have net profit after tax of $350 million and adjusted profit of $200 million.

Only three years remain for Ellwanger to fulfill his vision and Tower is still far from the profit target specified. If in the end it becomes clear that he was right and the markets were wrong then the bad years will finally end for Tower. If the market proves to be right, then shareholders will again have to undergo dilution to save the company from financial collapse.

The author is the chief strategist for the Ayalon Group

Published by Globes [online], Israel business news - - on March 24, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018