EUR 850.00 For Business Accounts Only

Morningstar | Infineon Provided Solid Financial Results but Sees Signs of Overheating; Maintaining EUR 20 FVE. See Updated Analyst Note from 01 Aug 2018

Infineon reported solid fiscal third-quarter results and provided investors with a fourth-quarter outlook that should put the company's year-end results at the high end of the firm's previous guidance. On the downside, management suspects that customers are double ordering power semiconductors, as the firm's book/bill ratio of 1.8 implies overheating, and chip orders sell in excess of what can be produced, shipped out, and billed. Such dynamics sometimes point to the top of an industry cycle, but Infineon's management noted that its fourth quarter forecast of 1%-5% revenue growth takes a haircut for such strong orders. Management is "carefully monitoring macro indicators" but still sees "unabated momentum" for its products. Automotive chipsets are one such example where macro headwinds may arise due to tariffs and European Union certifications that may lead to flattish global light vehicle sales, but the rising tide of increased electronics content per car bodes well for Infineon's future growth and demand, even in such an environment. We will maintain our fair value estimate of EUR 20 per share for narrow-moat Infineon and view shares as slightly overvalued, even with a 3% pull back after the firm's earnings report.

Infineon's revenue in the June quarter was EUR 1.94 billion, up 6% both sequentially and year-over-year, and ahead of the firm's prior guidance of 1%-5% sequential growth as discussed in May. Sales were up 10% year over year on a constant currency basis. Automotive chip sales remain stellar, up 9% year over year (13% in constant currency) in line with demand for chips used in electric vehicles and active safety systems. Power management chip sales were up 4% year over year (11% after adjusting for the sale of certain products to Cree), although Infineon noted demand is far outstripping supply for these products today and the strong book/bill of 1.8 suggests some levels of double ordering and, possibly, future order cancellations.

Higher sales levels enabled adjusted gross margins to rise 120 basis points sequentially to 39.2%. In turn, adjusted operating margin rose similarly by 120 basis points sequentially to 18.3%.

For the September quarter, Infineon expects revenue to rise 1%-5% sequentially. At the midpoint, sales are expected to rise 10% year over year. In turn, fiscal 2018 revenue is expected to rise about 7%. Fourth-quarter adjusted operating margin is expected to expand to 19%, thus lifting the firm's fiscal 2018 tally to 17.5%, again ahead of prior guidance. The firm was hesitant to shed insight into fiscal 2019 growth or profitability. We concur with management that Infineon is well positioned to take advantage of several tailwinds such as rising chip content per car and the need for greater power efficiency, but similarly, macroeconomic factors (and possible future headwinds) bear watching.