Is Fairchild Ready for a Breakout?

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The name Fairchild Semiconductor International (NYSE: FCS) might not sound very fashionable to you. It might not be a very well known smartphone derivative play like many of its semiconductor industry peers who are riding the mobile computing boom. But, it’s worth taking a look at as it might be getting ready to jump onto the bandwagon pretty soon.

The company’s recently reported second quarter might not appear quite attractive at first sight. Fairchild posted $361.5 million in revenue and 9 cents of profit, both of which missed Street estimates by some distance. The maker of analog chips for use in mobile computing devices, personal computers and automotives attributed the drab performance in the quarter to macroeconomic issues and weak PC sales.

In addition, the company forecasted a weak third quarter. All these points might not inspire much confidence in the stock at first. But there’s a reason why Fairchild has a 4 star (out of 5) CAPS rating. A closer look at the call transcript will reveal some strong drivers for the stock.

 

Growth drivers

The company is boosting its presence in tablets and smartphones. It has recorded some design wins and has started supplying chips for T-Mobile devices. Fairchild is counting on its cutting edge technology to gain more market share in mobile devices. Moreover, Fairchild had also featured in the latest iPad from Apple (NASDAQ: AAPL). Analysts have long been discussing the Fairchild-Apple relationship for a long time, and we finally saw it in the iPad.

 

The next Apple play?

And it might be possible that Fairchild can gain a lot out of Apple like many others. A few months back, Tiernan Ray of Barron’s told us about what FBR Capital thinks of the company’s relationship with Cupertino. Now if FBR’s analysis comes good, and Apple indeed becomes a crucial customer for Fairchild, the stock might just do enough to justify the rating it holds on Motley Fool CAPS.

We have already seen the likes of Skyworks Solutions and Cirrus Logic return great value to investors through their relationship with Apple and Fairchild might do the same going forward. In this article on AppleInsider a few days back, I learnt that Fairchild is engaged in a rapid production ramp up at its Maine plant in South Portland, and it is producing above capacity.

According to AppleInsider’s well-connected source, Fairchild will be meeting demand from Apple through its Maine facility for the rest of the year. Going by the production ramp up thats in progress, I won’t be surprised to see the company feature in a prominent manner in Apple’s upcoming devices.

 

Other positives

Apart from the Apple story, Fairchild is also seeing good traction in its LED lighting business. This segment grew an impressive 30% in the second quarter on a sequential basis and Fairchild expects the trend to continue. Even though LED lighting might face some headwinds in the form of low consumer spending due to the gloomy economic outlook, it expects the holiday season to help drive the segment’s growth.

 

Industry to look up

The malaise for Fairchild in its recent quarter was the overall industry weakness. This is also one of the reasons why the company’s peer, Cypress Semiconductor (NASDAQ: CY) is facing a torrid time, with the stock losing almost 7% after earnings. Cypress’ top line shrunk 21% in the previous quarter and it also expects a weak quarter going forward. But, a forecast from IDC might bring some relief to both Fairchild and Cypress.

IDC expects the semiconductor industry to grow at 4.6% this year, followed by a 6.2% jump in 2013. The industry is anticipated to be worth $335 billion by the end of next year, and jump to $380 billion by 2016. With the aftereffects of the Thailand floods now in the rear view mirror, and rapid growth of smartphone and tablets ahead of us, it doesn’t come as a surprise that the semiconductor industry is set for brighter days ahead.

The takeaway

Fairchild might have endured difficult times for some time now but the stock has done pretty decently so far this year. Although a year-to-date return of 11% might pale in comparison against some of its more illustrious peers, the stock holds promise going forward. With a supposedly blooming relationship with Apple and an expected improvement in the industry as drivers, it would make sense to keep an eye on Fairchild.

We would help you do just that through the Watchlist feature where you can add Fairchild by clicking here.


TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Cypress Semiconductor . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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