The Debt Dogs of Semiconductors

Charlie Munger, Warren Buffett's business partner, has condemned drugs, liquor, and leverage as humanity's three biggest downfalls. The first two are your own responsibility, but if you're invested -- or are thinking about investing -- in the semiconductor industry, you should know which companies in the space are the deepest in debt.

Leverage is not inherently bad for a company. A fast-growing company can intelligently employ debt to exploit its market opportunity. At low interest rates, debt can fund shrewd strategic acquisitions. Since it's generally cheaper than equity, debt can also lower a company's cost of capital.

But too often, companies end up abusing debt -- and as Munger reminds us, excessive leverage can lead to ruin. Let's examine a few of the most heavily indebted semiconductor companies.

Company

Total Debt/Capital

Interest Coverage

Tower Semiconductor (Nasdaq: TSEM  )

80.4%

0.7

NXP Semiconductors (Nasdaq: NXPI  )

78.9%

0.9

Linear Technology (Nasdaq: LLTC  )

73.6%

11.2

Advanced Micro Devices (NYSE: AMD  )

70.5%

2.8

Amkor Technology (Nasdaq: AMKR  )

68.2%

3.7

First of all, every one of these companies has a total debt-to-capital ratio less than 100%, which means that all of these companies have positive book value. Both Tower Semiconductor and NXP Semiductors, though, have too little operating income to cover their current interest payments, as their respective interest coverage ratios of less than 1 reveal.

Aside from the fact that Tower and NXP are struggling with their interest payments, the two companies don't have much financially in common. Tower Semiconductor is a $376 million-market-cap company with $482 million in debt and a very low 3.5 EV/EBIDTA multiple, which might put the company on value-oriented screens these days. NXP Semiconductors, on the other hand, is a $7.6 billion company with $4.6 billion in debt on its books, and a relatively high 12.8 EV/EBITDA multiple. The company's leadership in next-generation near-field communication (NFC) technology has led to a premium multiple when comparing NXP to its peers.

Linear Technology's figures also warrant mention. Though this company has $776 million in debt, it also has $748 million in cash in the bank, meaning its net debt figure is just $28 million. The company is also having no problems meeting its payments. Its interest coverage ratio indicates that the company can fund that obligation out of operating income more than 11 times over.

Neither Alex Pape nor The Motley Fool own shares of any company mentioned. Linear Technology is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 01, 2011, at 7:47 AM, LowRPics wrote:

    TowerJazz reduced and restructured $450 million of debt in 2010 so that most of its debt is due in 2015-2016. It held a record $198 million in cash at the end of the year, after generating a $121 million surplus from operations during the year. (earnings release)

    Looks like growth is driving this company, design awards are getting a backlog, the $198 Mill in cash may help the debt service, they are projected to earn $0.50 this year, projected to grow the 500 Mill company to a Billion in 2014. This may be a value pick or a value trap.....time will tell.

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