Morningstar | STMicro Still Cruising Along in Automotive Semis but Near-Term Gross Margin Expansion Is Limited. See Updated Analyst Note from 25 Jul 2018
STMicroelectronics reported solid second-quarter earnings and provided investors with a nice third-quarter outlook, with perhaps the only flaw being the expectation for no sequential gross margin expansion (at the midpoint of guidance). Nonetheless, ST's turnaround story continues, as the firm is well positioned in industrial and automotive semiconductors while also prospering from advanced content in smartphones, including Apple's next-generation iPhone, which is set to arrive in the autumn. We maintain our $22 fair value estimate for no-moat ST's U.S. ADR, while we are raising our fair value estimate for the firm's European shares to EUR 19 from EUR 18 based on currency effects. ST's European shares and U.S. ADR appear fairly valued to us.ST's revenue in the June quarter was $2.27 billion, up 18% year over year, up 2% sequentially, and just ahead of the firm's prior guidance. We're encouraged that ST saw double-digit year-over-year revenue growth across several end markets, including automotive, power discrete, imaging, analog, microcontrollers, or MCUs, and digital chips. ADG, the firm's automotive and discrete segment, was the bright spot, with sales up about 6.5% sequentially and up 15% year over year. Meanwhile, MDG, the firm's broader MCU and digital chip segment, grew 28% year over year. Gross margin improved 30 basis points sequentially and 190 basis points year over year to 40.2%
For the September quarter, ST expects sales to rise 10% sequentially at the midpoint, which implies 17% year-over-year growth. The firm still foresees healthy automotive demand across a variety of applications, and we're pleased to learn that ST expects $100 million of revenue for silicon-carbide-based automotive power semis in 2018. However, the firm guided for gross margins to remain flattish at 40.0% at the midpoint, which is mildly disappointing in our view, as higher sales levels will be mostly offset by a less favorable product mix toward smartphone-related products.
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