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Morningstar | Infineon Remains Notably Undervalued as We're Less Bearish on Cypress Deal; Maintain EUR 22 FVE

We have added Infineon Technologies to our Best Ideas list as the narrow-moat leader in automotive and power semiconductors trades at a sizable discount to our fair value estimate of EUR 22 per share ($25 per U.S. ADR). We believe the share price was unfairly punished in recent weeks by Infineon's  bid to acquire Cypress Semiconductor for EUR 9 billion (as measured by enterprise value). We remain generally in favor of the deal and don't view it as value destructive, as the strategic rationale makes sense for Infineon to strive to cross-sell its automotive products with Cypress' solutions. Infineon remains quite strong in semis used in the power train and active safety systems of the car with close ties to the European automotive supply chain, while Cypress' emerging automotive chip business is targeted at the infotainment system (where Infineon has no presence) and to Japanese car original-equipment manufacturers (thanks to Cypress' ownership of Fujitsu's microcontroller products).

The 46% premium that Infineon is paying for Cypress is a bit on the high side among recent semis deals but isn't an outlandish overpay. Although Infineon is leveraging up to fund the deal, we still like that it is remaining aggressive by opportunistically investing during an industry downturn. Even if Infineon were forced to pay a $330 million termination fee to Cypress in the event that regulators disallow the cross-border acquisition of a U.S. chipmaker, we think the combination is a deal worth gambling on. All the while, Infineon should still earn a mid-40s portion of revenue from the automotive industry, and despite sluggish near-term light-vehicle sales where headwinds might not abate anytime soon, Infineon's organic auto chip business should still thrive from secular tailwinds of rising chip content per automobile, particularly within the electrification of the vehicle (hybrids and electric vehicles) and active safety systems (cameras, radar, and so on).