Taiwan Semi’s $100 billion plan and housing is hot!

0:05Tyler Crowe:Tyler Crowe, Taiwan Semiconductor's earnings say full steam ahead for AI, and the housing market is getting some of its best news in a while. You're listening to Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money. I'm Tyler Crowe, and joining me today is Motley Fool analyst Matt Frankel. Matt, thanks for being here. Yeah, thanks for having me. It's always fun to be on with you. Yeah, we do a lot of conversations offline, and doing one here is going to be great. So, on today's show, the snacking industry is actually coming for the breakfast aisle. The housing market saw its first green shoots in a while. There's merger talk in the building supply industry. And Matt and I are going to give some earnings watches for the upcoming quarter. But we're going to start today's show with Taiwan Semiconductors, because they just released their second quarter, or June, earnings earlier today.

0:55Tyler Crowe:So, Taiwan Semiconductor Manufacturing's revenue rose about 39 % in the quarter. And TSMC CEO CeCe Wei said that AI chip demand still, they think, is outstripping the current supply that they have. And the company has pledged to spend$100 billion ramping up manufacturing. Now, Matt, I'm probably not alone in being flabbergasted every time I hear a projection about spending and capex related to AI. I mean, NVIDIA just passed the$4 trillion market cap threshold a couple days ago, and it's still hard to wrap my head around. I think the easy question is, will AI spend continue to grow? I think that's a little too easy.

1:36Tyler Crowe:So, I want to ask you, do you see AI CapEx spending continuing at this rate? Well, I mean, a 40 % year-over-year growth rate is only sustainable for about so long. And this is an acceleration, it's worth mentioning. Last year, in 2024, Taiwan Semi reported 30 % year-over-year revenue growth. So, this is a pretty big acceleration after an already very strong year. I think over the past 30 years, Taiwan Semi's revenue has grown at about an 18 % annualized rate. So, it's really picked up in the past couple of years because of all this AI spending. And this is a massive business, especially for one that doesn't make any of its own products.

2:17It makes products on behalf of other companies. Just to mention some on their customer list, Apple is their biggest one. But they also make chips for NVIDIA, AMD, Broadcom, Tesla. There are a lot of companies they make chips for on a third-party basis. These are deep-pocketed companies that are all committing a lot of money to AI investment. When you ask, will this continue, if you're asking over the next five years, I could see that growth rate actually being sustained. But if you're asking beyond, you know, at some point, we're going to hit a peak, but I don't think we're there just yet.

2:52Tyler Crowe:The interesting thing is a lot of the companies I follow are like in the construction industry related to AI, like all the electrical supply contractors and the builders and things like that. And their backlogs for AI data centers and all that stuff is still growing at really large rates. Their remaining performance obligations, is kind of their word for backlogs, have been growing at similar rates, which is also, to me, like a leading indicator for a lot of this, because you've got to build the data center before you can put any chips in it. So, beyond the same thing, beyond the five years, it starts to get really murky, because we're like, man, 40 % for five years straight is a lot.

3:30Tyler Crowe:But certainly, over the next two to three-year window, it doesn't seem unrealistic to continue to keep doing this. One of the really good ways to get ahead of demand is to look at what the data center industry is doing. I'm glad you brought up building for that reason, because so many data centers are being built right now. If you look at Digital Realty Trust or Equinix's construction activity, there's a lot going on. It creates a forward-looking projection, if you will, because a company will order a new data center, start building it. At some point later, it's going to be filled with chips and things like that.

4:06So, that's a really good forward indicator of how demand is doing.

4:10Tyler Crowe:So, let's put the rubber of the road here really quick regarding to Taiwan Semi. It's a recommendation in the Hidden Gems Dividend Service and several other multiple services. After seeing these results and the current valuation that we're looking at for Taiwan Semi, do you still see the stock as a buy? Yeah. I mean, given how quickly its revenue is growing, it trades for about 24 times forward earnings. things, there's not a lot to dislike about this company. That$1.2 trillion valuation sounds high, but it really isn't when you look at how the business is doing. Yeah. If we're looking at these numbers for two, three, four years, a company can grow into a 26x forward earnings valuation pretty quick.

4:56Tyler Crowe:It's hard to see it being an awful investment from here at current valuations. So next up, mortgage rates are on the decline and the housing market is responding quick. Support for the show comes from Fundrise. For the past 70 years, there's been a room in finance most people couldn't enter. A room where you could have invested in some of the biggest names in tech, companies like Airbnb and Uber before their multi-billion dollar IPOs. I'm talking about venture capital, but unless you had millions of dollars and the right connections, the door to the venture capital room was closed. You were stuck waiting in line with everyone else.

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6:05Tyler Crowe:So the housing market has been looking for something, anything resembling good news lately. And finally, it got a little bit. The average rate for a 30-year mortgage in the United States has declined five weeks in a row, and it's now down to 6.77%. Now, that certainly isn't the sub-3 % mortgages that we saw in the 2021 period, but it is a nice improvement from the greater than 7 % mortgage rates we've seen so far this year. And I know I have been mortgage rate shopping for quite some time. So, Matt, the housing market appears to be taking advantage of this situation much faster than we've seen other mortgage rate movements lately.

6:48Tyler Crowe:Something you've been following is housing volumes really picking up because of this. Yeah. You mentioned the other mortgage rate moves. This isn't the first time we've seen mortgage rates cool off from the highs, which is why this move is a surprise to a lot of people. Mortgage rates peaked at about 8 % when inflation was really high. But even then, they've come down a little bit, then they go up, then they come down, they go up, and they have oscillated between 7.5 % and 6.75 % in recent times. All the other times it's happened, this is the key difference, all the other times it's happened, there hasn't been a lot of housing inventory.

7:23Now, that's changed. There's a lot more inventory on the market with this decline. People who want to buy houses are taking advantage. Just to name some of the statistics, just last week alone, week over week, application volume was up more than 9%. 99%. Refinancing is 56 % higher than it was a year ago. People who got mortgages in the 8 % range are finding it valuable to refinance right now. Purchase applications are up 25 % year-over-year on a seasonally adjusted basis. The numbers really look surprisingly strong, given that over the past week, the average mortgage rate is down two basis points.

8:03It's not like it's been a a sharp decline in the past week, but now buyers are suddenly coming into the market.

8:10Tyler Crowe:Following the housing mode for the past couple of years, it's been like trying to poke somebody with a stick and say, come on, do something. And it's funny to actually see it finally happening. And part of me wonders if it's a little bit mortgage and also, or mortgage rates, excuse me, and a little bit of just like the people have been putting it off, putting it off, putting off, and using this as kind of that time to start taking the lid off, especially with the buying season here in the spring and summer. Now, you and I and a couple other people, longtime Motley Fool contributors, analysts, we spend way too much time talking about housing, investing in housing, investing in real estate.

8:48Tyler Crowe:There's some side channels that get a little unhinged. But with mortgage rates are declining, the probability of a rate cut actually looks to be in sight. Something that I have been hesitant to say for quite some time. And there is pent-up demand for homes. Matt, with this backdrop, what stocks in this particular market look interesting to you? I've been saying the homebuilders forever, and so have you. But it's really tough to gauge the dynamics of homebuilders when existing homes are becoming more appealing than they had been for a long time. So, I won't say that. I'm really looking at Rocket right now.

9:27RKT, the largest lender, They're a very profitable company. I think refinancing in particular is a big opportunity. I mentioned refinancing is up 56 % year-over-year. That's because rates fell to 6.77%. Imagine if rates fall to 6 % or 5 % in the next couple of years. Americans are sitting on$35 trillion in home equity. That's the most ever. A lot of it's just waiting to be tapped. A lot of people want to do big projects, but won't because it's expensive. Yeah.

9:59Tyler Crowe:Actually, the refi number was the one that really stood out to me as well. I didn't go to the mortgage originators like Rocket. I actually went to the home repair and remodel industry. Everyone stared at their walls in 2020, 2021, did all those projects. Now, it's been three, four years. Everyone's starting to get that etch to do projects again and with lower mortgage rates, refinancing is a good opportunity to that. So I've been looking at companies like Home Depot that have underperformed as just about the time the interest rates started to climb a few years ago. We had that big pull forward in remodel activity and things like that.

10:41Tyler Crowe:And so Home Depot and a lot of other building supply companies, and one company in particular is TopBuild. It's an installation distribution and installation contractors specifically for insulation. And that company just so happens to be the company we're going to be talking about next. They say leadership isn't just about where you're going. It's about the conviction it takes to get there. For those who demand the world and possess the drive to claim it, there's a vehicle of equal distinction. Dynamic by design and engineered for pure impact, the Range Rover Sport rises to meet you the moment you take the lead.

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11:58Tyler Crowe:Continuing on our theme of the housing market, home repair, building products, there's a company, Top Bill, they just mentioned it as a installation distribution installation contractor. They recently announced it's going to acquire Progressive Roofing. Matt, can you just give a quick breakdown of what this deal looks like? Progressive Roofing, as the name implies, they're one of the largest commercial roofing installers in the United States. They make about 70 % of their money from what's called re-roofing, which is people like me needing a new roof and maintenance, and 30 % from new construction homes, both of which can get pretty nice tailwinds if the real estate market keeps going as it's going.

12:38The deal is$810 million in cash. It looks like a great deal for Top Build if the market heads in the right direction. That's about nine times Progressive's EBITDA over the past 12 months. They expect there to be some synergies. Whenever you acquire two businesses that have some overlap, you can usually combine some operations and things like that and get some cost savings. It looks like a strong acquisition. They're going to have to take on debt to do it. Top Build has about$300 million in cash right now. So, roughly half a billion dollars will need to come up with through debt. But they have a really healthy balance sheet, about$1.4 billion in debt with an$11 billion market cap business and highly profitable.

13:22So, I like this deal. I think this is not the last consolidation we're going to see in the industry in 2025.

13:28Tyler Crowe:Yeah, I mean, we've seen some more splashy things when it comes to acquisitions here. Brad Jacobs of XPO Logistics and United Rentals and a bunch of other, we'll call it the boring economy guy who rolls up companies, is getting into building supplies with QXO. And it seems to be a hot activity lately as mergers, acquisitions, roll-ups in this industry. So, top build, as I said, installation of insulation, the real dirty work. Anybody that's done contracting work knows that insulation stinks as a job to do. But it's been a spectacular investment. After it got spun out of Masco Corporation in 2015, several Motley Fool recommendation services, you and I have been following this company and this industry for quite a while.

14:18Tyler Crowe:For Top Build, much of its success has come from rolling up those small distributors and installation contractors across North America. It's kind of been their calling card is going and buying out mom and pops who are maybe coming to the end of their time of wanting to run a business or some small regionals. You know, that success story of bolt-on acquisitions. Now, roofing isn't insulation. And so, honestly, I'm a little anxious when a company makes an acquisition that is slightly tangential to what they're doing. Am I being a little too apprehensive here? Because, you know, I do tend to be a little bit more nervous than you.

14:57Kind of. Well, insulation and roofing are related parts of the business building process. It's not like they're an insulation company and they're acquiring a concrete manufacturer or something like that. It's a very related part of the business. But I do get your point. Some of the synergies I mentioned come from the fact that there's a lot of overlap in the processes. You generally don't put in a new roof without checking your insulation at the same time. So, there is a lot of overlap here. But no, I definitely get your point when companies kind of start to step outside of their wheelhouse a little bit.

15:32So, it'll be worth watching. But, I mean, it looks like the price is right. So, they have some wiggle room to have a learning curve in there, if you will.

15:40Tyler Crowe:I'm probably a little too nervous by nature. But I do have to admit, as I've looked at this deal, I think overall, yeah, we can talk about the business stuff. But more importantly for me, I think management has developed enough of a track record that I'm willing to give them the benefit of the doubt right now, or tie goes to the base runner, I guess, if you will. And with the refinance market picking up, so could activity in the roofing business along with insulation. So it might be a good time to be making this kind of acquisition. And speaking of M &A, we're going to move on to our next story here, which is going from roofing to the breakfast aisle, because that seems to be getting a hot market that also just happens to be getting a little bit sweeter.

16:23Tyler Crowe:Earlier today, Ferrero Rocher, or Ferrero International, an Italian private company, has agreed to acquire W.K. Kellogg for about an enterprise value of$3.1 billion. W.K. Kellogg, of course, was the cereal business that was split out of Kelanova, I believe it was either last year or a couple of years ago. It was a relatively recent split for the two companies where Kelanova wanted to focus on the snacking industry. W.K. Kellogg was going to take the cereals. But Ferrero Rocher is very much a candy company. It's interesting to see them going in this direction. It's about$23 per share for W.K. Kellogg in cash, about 31 % premium in Kellogg's closing price today.

17:11Tyler Crowe:Matt, what did you actually think about this deal? I know it's hard to really put a pin on private companies, especially an Italian one. We don't seem to have a lot of information on private Italian companies here in the U.S. public markets, but we've seen tons of M &A activity and kind of flirting with M &A activity. We saw Mondelez and Hershey kind of talking about getting together early or late last year. Do you have any insights as to why you think there's so much talk and commotion in the packaged food industry lately? Well, in this particular case, there's a couple of key takeaways. One is that Ferrero has been building out its U.S.

17:57portfolio for some time. They acquired all of Nestle's U.S. candy business a couple of years back, for example. You might have some of their products in your house right now and not know it. It's summertime. A lot of people keep those Bomb Pop popsicles in their fridge. That's a Ferrero product. They have a lot of brands that are very well-known to Americans. Second, and this goes more to the broad packaged food industry that you were talking about. The definite trend is to not only diversify your product portfolio, but diversify it in a way toward healthier products. Now, I know a lot of Kellogg's cereals, I mean, Frosted Flakes are not health food, but things like Kashi and Raisin Bran and Rice Krispies.

18:37We've seen a lot of the companies that specialize in sweets, like Coca-Cola, Pepsi, really diversifying to not necessarily health foods, but to more healthy brands that consumers seem to want more nowadays than their traditional products. I think it's a diversification to maybe anticipate some changing tastes in the market, to insulate themselves from being just a sweets company. That's a common trend that we've been seeing throughout the packaged food industry.

19:06Tyler Crowe:Yeah. It seems like it's an industry that has been struggling with debt, with trying to figure out a lot of what they're doing with their maybe some brands that are getting a little stale, trying to do some refreshes at the same time. For a lot of these snacking companies, really, really high cocoa prices haven't exactly helped them along the way when it comes to trying to make a lot of this work. And a lot of dividend stalwarts have been really, I would say, struggling to really grow the business, and we've seen it in their valuations of late. Honestly, with the packaged food company industry, I don't know if I'm that interested in any stocks right now, but it's certainly much more fascinating to watch with a lot of these portfolio reshufflings.

19:53Tyler Crowe:Is there anyone in particular that is on your radar? I honestly think Pepsi and Coca-Cola are the two standouts in the industry still and have done the best job of adapting to changing tastes over time out of all the packaged food companies. I'd probably give it to Pepsi because they have a lot more food than beverage. On our way out here, let's take a quick 30 seconds. Second quarter earnings is coming up. What are you watching? Banks are the obvious answer just because they're reporting first, but they're also a really good proxy for just general consumer health. By looking at things like loan defaults, by looking at trading volume trends, how volatile things have been there.

20:33There's a lot you can tell from bank earnings that have implications on pretty much every other company in the United States. That's really what I'm watching next week. And Prologis is another company that reports early that we've talked about that is on my radar. They say they're nearing an inflection point. I want to see if we're there yet.

20:50Tyler Crowe:This quarter, I'm actually going to be watching Home Depot for a lot of the reasons that we mentioned about when we're talking about mortgage rates. Less for the actual earnings, but I really want to dive into the earnings transcript and see if some of this activity that we just talked about with refi is translating into increased demand, and if management thinks that this is a continuing trend or a little bit of a short-term blip that we've been hoping would actually last longer than a couple of quarters here with the mortgage market. Matt, thank you so much for joining me today on Motley Fool Money.

21:24Tyler Crowe:As always, people on the program have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Advertisements or sponsored content are provided for informational purposes only. See our full advertising disclosure. Please check out our show notes. I'm Tyler Crowe. Thanks for listening. We'll see you tomorrow.

21:56You