EUR 850.00 For Business Accounts Only

Morningstar | Infineon Still Powering Ahead in Automotive and Power Semis; Shares Undervalued

Infineon reported strong fiscal fourth-quarter results and provided investors with an impressive forecast for fiscal 2019, in our view, in light of recent sluggishness in near-term chip demand. Infineon appears to be well positioned within pockets of healthy demand and believes it is on pace to outperform many of its U.S.-based peers in the months ahead. We are raising our fair value estimate for narrow-moat Infineon to EUR 22 per share from EUR 20, mainly due to the time value of money as we roll our valuation model, but also in light of the firm's relatively bright near-term outlook that was ahead of our prior expectations. Shares fell about 8% on the news, perhaps in light of a broader tech sell-off, but we think the dip is providing long-term investors with a near-term buying opportunity for an industry leader in power semis with strong secular growth tailwinds in the automotive and industrial sectors, in particular.

Revenue in the September quarter was EUR 2.5 billion, up 5% sequentially, up 12% year over year, and above the high end of the firm's previous guidance of 1%-5% sequential growth. Despite weakness in car sales in China and Europe, Infineon's automotive chip business held up well, up 4% sequentially and 18% year over year. The firm noted strength in China electric vehicle car sales, running counter to soft sales of gas-powered cars in the region. Power management sales were up 12% sequentially and 14% year over year with broad-based demand. Higher sales levels enabled adjusted operating margins to rise 120 basis points sequentially to 19.5%.

Infineon expects revenue in the December quarter to fall 2%-6% sequentially, although sales would still be up 11% year over year at the midpoint, in contrast to modest growth expected by U.S. rivals in the months ahead. For fiscal 2019 (ending September), Infineon expects revenue to rise 9%-13% sequentially.

Infineon's near-term sales appear to be pinpointed at areas of automotive and industrial chip demand that have been immune (at least thus far) to sluggish business conditions. As an example, China car sales were down 10% in the month of September but, per management, EV sales were up 55% in the same month. Infineon's power semis are crucial components in EV's, and the firm's results may provide investors with the best evidence yet that the automotive story for chipmakers is far more about rising content per vehicle rather than car unit sales growth. Similarly, China's focus on electric train networks and renewables has still supported demand for Infineon's power semis despite a likely downturn in overall GDP growth in the region. Management provided color that its 9%-13% revenue growth target for fiscal 2019 included probability weighted scenarios for further downside in China, which we think is prudent. We forecast revenue growth in fiscal 2019 below the 11% midpoint of guidance, yet our 10% forecast is still a bit above our prior expectations heading into the earnings release.

We were quite impressed with Infineon's outlook for fiscal 2019. Perhaps the only data point that was not as bright, in our view, is the firm's adjusted operating target of 18% for the year, as compared with 17.8% in fiscal 2018. Yet, given the company's capacity expansion and investment in relatively lower margin (but higher growth) automotive opportunities like Silicon-carbide based semiconductors, we're unconcerned about Infineon's long-term earnings power and anticipate the firm can maintain high-teens adjusted operating margins, if not reach the 20% range, in the years ahead.