EUR 850.00 For Business Accounts Only

Morningstar | Infineon's Call for 2H Rebound Was Premature; Maintain EUR 22 FVE, Shares Undervalued

We will maintain our fair value estimate of EUR 22 ($25 per U.S. ADR) for narrow-moat Infineon Technologies despite the company's downward forecast revision amid a sluggish macroeconomic environment and weakness in China, particularly related to automobile sales and a buildup of power management chip inventory in the region. For all of fiscal 2019 (ending September), Infineon now foresees 6% revenue growth, down from its prior forecast of 9%. The revenue slowdown will weigh on Infineon's bottom line, as excess manufacturing capacity will cause adjusted operating margins for fiscal 2019 to fall to 16%, down from the prior outlook of 17.5% and 18% earned last year.

We note that Infineon's prior forecast for fiscal 2019 was relatively optimistic when it was provided in early February, as the company essentially pointed to a second-half snapback in demand. We currently tend to think of this downward revision as Infineon having a less-than-clear crystal ball, rather than a massive deterioration in business conditions over the past couple of months. Infineon's results for the March quarter are tracking in line with prior expectations, although the company's downward forecast for the second half of the year essentially suggests that some of the sales in the March quarter were not necessarily matching end-market demand but rather due to inventory buildups at customers in China. All in all, while chip demand remains sluggish, the new news, in our view, is that Infineon's call for a second-half snapback in demand may have been a bit premature, as the firm now foresees a "muted" seasonal recovery.

Taking a longer-term view, we still don't see any structural destruction in demand associated with rising chip content in automobiles or more advanced power semiconductors going into a variety of industrial and renewable applications. We still foresee Infineon weathering this latest industry storm and view the shares as modestly undervalued today.

Infineon is now more bearish on the health of automotive unit sales, embedding a low- to mid-single-digit decline in global light-vehicle sales in its revenue forecast versus flattish auto sales in its prior revenue forecast. Such expectations are quite reasonable, in our view. Nonetheless, Infineon is still calling for 6%-plus revenue growth from its automotive chip business, which gives us ongoing confidence that the automotive chip revenue growth story is far more tied to rising chip content per car in safety and electrification applications than to simply the rise or fall in car unit sales.