Neutral on Infineon Technologies


We maintain a Neutral rating on Infineon Technologies (IFNNY). The company recently reported a very modest first quarter of fiscal 2012 with a 9% decline in revenues. Earnings were $0.02 below the Zacks Consensus Estimate of $0.12. Results were primarily impacted by cautious consumer spending due to global economic uncertainties and lower demand across all three segments.

However, going forward the company is positive about its performance in the auto sector and is also expecting its power semiconductor business to pick up in fiscal 2012. Infineon’s current valuation also suggests that it has a good upside potential moving forward.      

Infineon is a market leader in each of its target markets and is the second largest manufacturer of semiconductors in Europe. The company is not only a leader in the power semiconductor segment, the security and access technology segment, but also has achieved the leadership position in the automobile sector as well. The company is very positive about its performance in the auto sector driven by strong performances of many of its primary customers.

Infineon’s semiconductor business is expected to enter an up-cycle, as the commencement of every semiconductor up-cycle usually begins at a time of macro economic uncertainty. Furthermore, the company is expecting a huge order growth for its power semiconductor business.

The power semiconductor sector is expected to be one of the fastest growing areas in the semiconductor space as a whole, with an expected CAGR of 10% due to their ever-increasing use in motors and electronic devices to improve energy efficiency.

Demand for Infineon’s products is strong and the company also runs at full capacity. Furthermore, the company makes huge capital investments along with significant investments in research and development.

Infineon has already spent about one-third of its annual investment budget during the first quarter. This suggests that the company is very confident about its growth going forward, although it had a modest beginning to fiscal 2012. In addition, the company’s valuation is at a 53.5% discount to its peers and is trading at the low end of its historical guidance, again implying that the stock has good potential going forward.

However, the company’s business in particular and the semiconductor industry in general are highly cyclical and characterized by constant and rapid technological change, as well as rapid product obsolescence and price erosion, evolving standards, short product life-cycles and wide fluctuations in product supply and demand. This is more relevant for the Communication Solutions segment.

For logic products, the cycle for test, evaluation and adoption of its products by customers before the start of volume production can range from several months to more than a year. Due to this lengthy cycle, it may experience significant delays from the time it incurs expenses for R&D, marketing efforts and investments in inventory to the time it generates corresponding revenue, if any.

Semiconductor manufacturing is very capital-intensive. The manufacturing capacities that are essential to maintain a competitive cost position require large capital investments. A high percentage of the cost of operating a fab is fixed; therefore, increases or decreases in capacity utilization can have a significant effect on profitability.

Infineon Technologies currently has a Zacks Rank # 4 which implies a short term ‘Sell’ rating on the stock.

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