EUR 850.00 For Business Accounts Only

Morningstar | Infineon Expects to Outlast the Latest Chip Industry Downturn; Maintain EUR 22 FVE

Infineon reported solid fiscal first-quarter earnings despite sluggish demand for semiconductors. Unsurprisingly, the company lowered its full-year revenue forecast to the low end of its prior guidance of 9%-13% annual growth, but we're still impressed that the firm's forecast for the March quarter calls for 7% year-over-year sales growth at the midpoint. We're encouraged that Infineon expects its automotive business to grow at an even faster pace than its 9% total revenue forecast, even though the company expects global light-vehicle unit sales to be flattish in 2019. We attribute the strong automotive forecast to rising chip content per car, which remains one of our favorite secular growth drivers in semis. We will maintain our EUR 22 fair value estimate ($25 per U.S. ADR) for narrow-moat Infineon. Shares appear modesty undervalued, but we see even more attractive margins of safety among the company's peers, such as STMicro and Microchip Technology.

Revenue in the December quarter was EUR 1.97 billion, down 4% sequentially but up 11% year over year and at the midpoint of the firm's prior guidance of a 2%-6% sequential decline. Automotive revenue, the firm's largest segment, fared well, with revenue up 10% year over year and only a 2% sequential decline, again thanks to rising chip content used in active safety systems and electric vehicles. Industrial revenue was up 19% year over year but down 2% sequentially, driven by demand from renewable energy customers, offsetting some near-term weakness in home appliances and industrial drives, which, based on comments from Infineon's peers, are two end markets bogged down by trade tensions. The firm's power management chip segment rose 13% year over year but was down 5% sequentially, with well-publicized near-term weakness in smartphone and data center chip demand. Despite lower sequential sales, adjusted gross margins dipped only 20 basis points to 40.4%.

For the March quarter, Infineon expects flattish revenue, plus or minus 2 percentage points. Automotive and digital security solution revenue is expected to grow sequentially, while industrial demand should be flattish and power management chip sales should be down a mid-single-digit percentage sequentially, consistent with seasonal weakness in smartphone demand. The firm expects adjusted operating margin to come in at 16% compared with 18.2% in the December quarter.

For all of fiscal 2019, Infineon lowered its full-year revenue forecast to 9% from the prior range of 9%-13%, due to macroeconomic weakness and geopolitical factors that have weighed on demand in certain end markets like smartphones, data centers, home appliances, and factory automation. Similarly, Infineon knocked down its full-year adjusted operating margin target to 17.5% from 18%. Nonetheless, 9% growth in fiscal 2019 would still likely outpace the broader semiconductor market, which we attribute to the firm's strength in automotive and power semiconductors.