EUR 850.00 For Business Accounts Only

Morningstar | Littelfuse an Attractive Power Play; Initiating With $190 Fair Value Estimate, Narrow Moat

We are launching coverage of electronics component supplier Littelfuse with a $190 fair value estimate. At current prices we do not see an attractive margin of safety for would-be investors. However, while not the largest electronic component supplier in the market, we believe the firm benefits from the same customer switching costs experienced by larger peers, like Amphenol, and thus warrants a narrow moat rating.

Littelfuse is a global leader in the circuit protection market with a growing suite of sensors and power control products. The firm’s suite of fuse, automotive sensors, and power semiconductors are used in consumer electronics, industrial, and automotive markets. We believe reliability, consistency, and safety in the latter two markets is essential, which leads to sticky relationships with customers in mining, energy, commercial transportation, and increasingly, the automotive market. In all, we believe the customer switching costs will enable Littelfuse to realize excess economic profits for at least the next decade.

Thanks to secular and technological trends driving increased connectivity, emissions, safety, and efficiency standards, demand for Littelfuse’s products has been very strong over the last five years. Nowhere is this more evident than in the automotive market, where the demand for increasing electronic content in the vehicle--between body electronics, infotainment, lighting, assisted safety systems, and energy efficiency systems--have kept Littelfuse’s and its peers revenue growth well ahead of the low-single-digit automotive production rate. We do not see these trends slowing and believe they will be able to support Littelfuse’s mid-single-digit organic revenue target even while larger peers will similarly benefit.

Littelfuse’s strategy is increasingly reliant on successfully identifying, purchasing, and integrating acquisition targets. This has included consolidating its position in the core markets through purchasing competing businesses, broadening its geographic reach, and expanding its technology platform. In 2018, the firm announced the purchase of power semiconductor supplier, IXYS, for $856.5 million, which was Littelfuse’s largest acquisition to date. We believe the purchase has broadened the firm’s power semiconductor capabilities to sufficiently serve the growth trends in medium to high power markets. This will allow the firm to be more competitive in areas like EV charging infrastructure as well as higher margin opportunities in industrial motors.