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Why Tower Semiconductor May Have a Compelling Stock

Stocks in this article: TSEM INTC PCRFY

NEW YORK (TheStreet) -- Shares of Tower Semiconductor (TSEM) -- an Israeli chip maker that does business under the brand name of TowerJazz -- have been on the upswing ahead the company's second-quarter earnings release, which is scheduled for Aug. 4.

Since Wednesday, when TowerJazz announced the timing of the release, its stock has risen more than 10% on heavy volume. The stock rose 14% rise on Wednesday after Ascendant Capital Markets set a $24 price target. One report suggested that the rise was in relation to a positive earnings report from chip industry giant Intel (INTC)

Shares of Tower have doubled year to date, compared with a 6% rise for the Nasdaq Composite Index.

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The stock -- which changed hands at $11.35, down 16 cents, on Tuesday morning -- traded as high as over $500 in its early days a publicly traded company in the mid-1990s and fell to less than $2 a share during the financial crisis in 2008 and 2009. The company had a 15-for-1 reverse stock split in 2012.  

Things are looking up for Tower. The company is expected to report second-quarter earnings of 42 cents per share, compared with earnings of 36 cents a year ago. Revenue for the quarter is expected to reach $225 million, up from $133 million a year earlier.

Earnings are projected to be $1.71 per share for this year and $2.46 per share for next year. That means the stock is trading less than 10 times forward earnings.

The catalyst for Tower's growth is a joint venture with Japanese electronics giant Panasonic (PCRFY). which closed in April. Under the joint venture, in which Tower has a 51% stake, Tower is making chips for Panasonic to be used in cars and digital products.

Panasonic has transferred three of its semiconductor plants in Japan to the venture and has agreed to purchase roughly $100 million in chips from the venture each quarter for the next five years. Results from the venture will be included in Tower's second-quarter financial report for the first time.

With the venture, Tower consolidated one of its plants in Japan, a move that is expected to save the company $130 million per year. That could more than offset the expected low profit margins from the Panasonic venture. Margins are expected to be low because Panasonic will receive almost half of the venture's profits and because of some subcontractor payments.

Note: This article contains one or more stocks with a market cap between $350 million and $2 billion. Such small-cap stocks tend to be volatile.

At the time of publication, the author was long Tower.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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