EUR 850.00 For Business Accounts Only

Morningstar | STM Updated Forecasts and Estimates from 04 Jan 2019

STMicroelectronics reported solid third-quarter results and provided investors with a fourth-quarter forecast that was relatively more bullish than the outlook provided by U.S. rival Texas Instruments but still pointed to soft chip demand in China. Whereas Texas Instruments essentially called for the top of the latest chip cycle in its December quarterly outlook, STMicro's forecast wasn't as downbeat for next quarter but we still think a slowdown is on the horizon for the company and its peers. We are maintaining our fair value estimates of $22 for the firm's U.S. ADR and EUR 19 per European share. With the stock down in excess of 8% on the news, we see an attractive margin of safety in STMicro today, although we still see Microchip Technology as our top pick out of STMicro's peer group.

STMicro's third-quarter revenue of $2.52 billion, up 11% sequentially and 18% year over year, was just ahead of the midpoint of the firm's prior guidance of 10% sequential growth. The firm's analog and MEMS sensor business saw robust growth as it ramped up products going into Apple's latest iPhones, with sales up 47% sequentially and 37% year over year. Despite recent tariff concerns among automakers, the firm's auto chip demand was still healthy, up 4% sequentially and 16% year over year, which we attribute to the favorable secular trend of rising chip content per car. The weak spot was its microcontroller (MCU) business, which fell 8% sequentially and rose only 2.5% year over year. STMicro noted reduced new chip demand in China due to production slowdowns causing customers to purge inventory on hand.

STMicro expects December quarterly revenue to rise about 6% sequentially, which would represent about 8% year-over-year growth, a deceleration from the 18%-plus year-over-year growth seen over the last three quarters. We expect MCU sales to decline sequentially again, albeit by a lesser percentage, as inventory adjustments taper off.

STMicro was, perhaps surprisingly, still quite bullish on the automotive sector, despite less-than-glowing monthly auto sales and car OEM commentary in recent weeks. We can't rule out the possibility of automotive production (and thus chip demand) getting worse before it gets better, but we're encouraged to see that rising chip content per car has helped the firm's automotive chip business hold up well in the near term thus far.

All in all, the long-term trends of rising chip content in automotive and industrial products still appear intact, and we remain bullish on STMicro's ability to profit from these trends over the next 5 to 10 years. While we are more bearish on its 2019 results, we anticipate a snapback in demand thereafter, and our revenue and EPS estimates for STMicro in 2020 and beyond remain relatively unchanged.