What the Wall Street Journal Doesn't Tell You About UMC Stock

One of the biggest losers as of today's afternoon session is semiconductors company United Microelectronics, whose shares are down -3.0%, underperforming the Nasdaq by -2.9%.
At $6.53, UMC is 5.5% below its average analyst target price of $6.91.

The average analyst rating for the stock is hold. UMC lagged -2.7% behind the S&P 500 index today, and by -23.9% over the last year, returning -43.9%.

United Microelectronics's trailing 12 month P/E ratio is 6.3, based on its trailing Eps of $1.04. The company has a forward P/E ratio of 8.6 according to its forward Eps of $0.76 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 26.5, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide United Microelectronics's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.17. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing UMC's growth potential .

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on UMC's margins:

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 213,011 140,961 33.82 53.38
2020-12-31 176,821 137,824 22.05 53.34
2019-12-31 148,202 126,887 14.38 n/a
  • Average gross margin: 23.4%
  • Average gross margin growth rate: 53.4%
  • Coefficient of variability (higher numbers indicating more instability): 41.8%

We can see from the above that United Microelectronics business is not strong and its stock is likely not suitable for conservative investors.

United Microelectronics's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 90,352 -49,960 40,392 8.03
2020-12-31 65,745 -28,354 37,391 4.03
2019-12-31 54,904 -18,962 35,942 n/a
  • Average free cash flow: $37,908,421,666.70
  • Average free cash flow growth rate: 6.0%
  • Coefficient of variability (lower numbers indicating more stability): 6.0%

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in UMC have received an annualized dividend yield of 44.6% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for technology companies is 5.57. In contrast, the average P/B ratio of the S&P 500 is 2.95. United Microelectronics's P/B ratio of 0.1 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock.

As of third quarter of 2022, United Microelectronics is likely undervalued because it has a very low P/E ratio, an exceptionally low P/B ratio, and a steady stream of strong cash flows with an upwards trend. The stock has strong growth indicators because of its inconsistent operating margins with a positive growth rate, and a PEG ratio of less than 1. We hope this analysis will inspire you to do your own research into UMC's fundamental values -- especially their trends over time.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.