Tower Draws Short Seller's Eye as China Sets Off Global Rout

  • Semiconductor stocks dropped on fear of falling iPhone sales
  • Analysts say Tower's market share gains offset China weakness

With global stocks posting their worst start to a year ever, it’s not difficult for short sellers to find companies to pick on.

Tower Semiconductor Ltd., whose chips are found in everything from X-ray machines to iPhones, is the latest target. Spruce Point Capital Management, which helped lop off $1 billion of Caesarstone Sdot-Yam Ltd.’s market capitalization last year, accuses the Israeli company of accounting irregularities and a flawed business plan. Wall Street analysts dismiss the claims and recommend buying the stock.

Tower shares are down 14 percent this year, compared with a 10 percent decline in the Philadelphia Stock Exchange’s Semiconductor index. Short interest in the stock has climbed to 3.3 percent of shares outstanding, the highest since March, according to Markit, a London-based research firm. Tower shares added 0.5 percent to $12.05 at 11:58 a.m. in New York. They rose 4.3 percent last week.

Source: Markit

The timing of Spruce Point’s attack is spot on. Investors are apprehensive about suppliers of components of smartphones sold in China, whose sputtering growth and policy missteps are roiling markets from New York to Shanghai. Qorvo Inc., a customer of Tower’s, lowered its revenue forecast earlier this month. That has fed speculation Apple Inc. may be cutting back production of its best-selling gadget to the world’s biggest smartphone market.

For some, such concerns about Tower are misplaced. Drexel Hamilton LLC points out that the company has been gaining on rival Global Foundry Co. Another consideration: Smartphones account for less than a quarter of Tower’s business, albeit the fastest-growing one.

“It’s been more of an impact on the multiple and stock price than anything to do with fundamentals,” Cody Acree, an analyst at Drexel who recommends buying Tower shares, said by phone. “One customer might be a little better or a little softer, but in the aggregate their demand has really been unaffected.”

A Tower spokesman didn’t respond to a request for comment made after normal business hours in Israel, though the company released a statement Monday on the Spruce Point report and a class action lawsuit filed against the company.

Spruce Point’s report “is deceptive, demonstrative of a broad lack of understanding of generally accepted accounting principles and of our strategy and business model,” Tower’s Chief Executive Officer Russel Ellwanger said in the statement. “The alleged claims are totally without merit and we will forcefully pursue this matter until dismissal of all claims,” Ellwanger said of the lawsuit.

Ben Axler, managing partner at Spruce Point, declined further comment.

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