EUR 850.00 For Business Accounts Only

Morningstar | Infineon Sees Near-Term Softness, but Secular Growth Drivers Remain Intact; Maintain EUR 22 FVE

Infineon reported solid fiscal second-quarter results and provided investors with a decent outlook for its fiscal third quarter and for all of fiscal 2019 (ending in September) consistent with the firm's revised forecast provided to investors in late March. Chip demand remain sluggish due to trade tensions, as evidenced by the firm's lowest book-to-bill ratio in six years. We still think Infineon is well positioned to capitalize on the secular trend of rising chip content per car, especially in electric vehicles, which was one sub-segment of Infineon's automotive business that remained resilient. We will maintain our EUR 22 fair value estimate ($25 per U.S. ADR) for narrow-moat Infineon, and we view shares as slightly undervalued.

Revenue in the March quarter was EUR 1.98 billion, up 1% sequentially, up 8% year over year and above the midpoint of the firm's prior forecast of flat revenue as discussed in late March. Automotive chip sales remained the bright spot for Infineon, up 3% sequentially and 8% year over year, again with healthy demand for power semis used in electric vehicles. Power management chip sales fell 4% sequentially (though still up 9% year over year) with weaker demand and an inventory buildup across many end markets. However, annual price declines on automotive chips and factory underutilization caused adjusted gross margin to fall 190 basis points sequentially to 38.5%. In turn, adjusted operating margin fell 150 basis points sequentially to 16.7%.

For the June quarter, Infineon expects sales to rise 1% sequentially, plus or minus 2%, along with a 15% adjusted operating margin as Infineon will "decelerate production significantly." For all of fiscal 2019, Infineon foresees 3%-7% revenue growth with sales coming in at EUR 8 billion, along with 16% adjusted operating margin for the full year.

Despite the near-term weakness, we continue to view Infineon as well positioned to weather the latest chip industry downturn, thanks to its expertise in automotive and power semis, in particular. Looking at automotive, Infineon now expects global automobile unit sales to decline a low- to mid-single-digit percentage in calendar 2019, which will continue to offset the positive content gains per car seen by the firm as it sells into EVs and active safety systems.