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Morningstar | STMicro Provides Bullish Commentary and Foresees Company-Specific Tailwinds; Maintain $22 FVE

STMicro reported decent fourth-quarter results and provided investors with a predictably soft first-quarter forecast with declining chip demand from Apple and a broad base of Chinese manufacturers. The far bigger news, in our view, was ST's bullish views on its end markets. ST said it expects the first quarter to be a bottom for its China business; it anticipates sequential sales growth in the second quarter and an acceleration of such growth in the second half of 2019. ST also believes that the semiconductor end markets in which it competes will not decline in 2019, while also stating that it expects to outperform such markets, thus implying year-over-year growth.

We're a bit wary of ST's bullish crystal ball, as China-U.S. trade tensions persist and no other chipmaker has gone out on such a limb regarding its views of the chip industry, so we're modeling a 4% year-over-year decline in revenue for ST in 2019. Nonetheless, ST still has a couple of company-specific factors in its favor that keep us optimistic about its prospects, such as its leadership position in supplying silicon carbide-based power semis into Tesla's electric vehicles and expectations of rising content in Apple's next round of iPhones later this year. Meanwhile, ST said it has over 100,000 customers and is still well poised to profit from rising chip content in autos and industrial equipment in the long term. We will maintain our fair value estimates of EUR 19 per share and $22 per U.S. ADR for no-moat STMicro. The shares are up about 10% on the good news, but we still view them as undervalued.

ST's revenue in the December quarter was $2.65 billion, up 5% sequentially and 7% year over year but slightly below the firm's guidance of 5.7% sequential growth (at the midpoint) discussed in October. Automotive and discrete power semiconductor sales were the bright spot, as revenue in this segment was up 7% sequentially and 18% year over year.

ST's analog and MEMS business unit saw sales rise 10% sequentially and 9.5% year over year, thanks to demand for the firm's imaging products used in Apple's iPhones, although such sales will drop off dramatically in the first quarter due to Apple's inventory correction amid sluggish iPhone demand this past holiday season. Microcontroller chip demand remained weak as this business unit saw sales fall 4% sequentially and 7% year over year. China continues to be the culprit for the shortfall in new MCU orders due to soft consumer electronics demand in the region and as trade tensions may be disrupting production, exports, and the addition and expansion of new manufacturing facilities in the region.

For the March quarter, ST expects revenue to fall to $2.1 billion at the midpoint, which would be down 5.7% sequentially (plus or minus 350 basis points) and 20.7% year over year. ST anticipates further MCU weakness in China as well as a sharp decline in imaging products going to Apple. Gross margins are expected to dip to around 39% versus 40% in the December quarter, although factory utilization is still expected to hold up relatively well in the high 80s, per management.

On the brighter side, ST anticipates sequential revenue growth in the June quarter (although not necessarily year-over-year growth), which is one of the more optimistic comments made by broad-based chipmakers in recent months. From there, ST expects even stronger sequential growth in the second half of 2019, although some of it is likely due to seasonality associated with Apple's iPhone production ramp. We still model modest year-over-year revenue declines for ST throughout all of 2019, but we're again encouraged by the firm's company-specific tailwinds.

Content gains and design wins with Tesla and Apple have been a boost to ST's broad-based business. ST is especially bullish on its silicon carbide-based power semis business, as the firm now has over 30 active silicon carbide projects in the works today compared with 20 or so last quarter. ST is also investing in capital expenditures in 2019 in order to expand capacity in silicon carbide and imaging products.