Infineon Technologies IFNNY reported strong secondquarter results that were moderately ahead of our expectations, and we are maintaining our $8 fair value estimate and no-moat rating of the firm.
Infineon sales grew 8% sequentially during the second quarter to EUR 918 million, largely driven by 12% sales growth to automotive customers. Infineon is optimistic that stronger-than-expected automotive sales could lead increased sales to car makers in the second half of the year, which is likely to compound the benefits from the growing number of electronics being used in cars. We are less optimistic about near-term sales growth from Infineon’s other segments; the Industrial Power Control segment is suffering from its large exposure to the Japanese yen and weak demand for renewable energy in Europe. Meanwhile, low shipments of PCs are hampering Power Management and Multimarket sales, and demand for Chip Card and Security remains relatively muted. The non-automotive markets are largely being weighed down by macroeconomic conditions and government austerity, but Infineon is an established supplier to each market and should benefit when the European economy starts to recover. On the operational front, currency headwinds offset manufacturing utilization improvements, causing gross margins to drop 60 basis points sequentially. However, Infineon’s operating margin jumped to 7.4% from 5.2% in the prior quarter due to better sales volume and sequentially flat operating costs.
Looking ahead, management is projecting third-quarter sales of approximately EUR 1.0 billion, and expects operating margins to increase to about 10%. Infineon still expects sales declines of 5%-9% in the fiscal year 2013, with operating margins in the mid- to high-single digits, but is optimistic that improvements in the second half could lift its full-year sales and profitability into the upper end of guidance. We anticipate Infineon’s sales in the second half could remain muted as regional economic malaise continues to weigh on European customers, while Japanese-based competitors benefit from depreciation in the yen. While we believe Infineon retains a strong position within the chip industry, we would like to see a greater margin of safety before recommending the firm as an investment.