Keep Your Eyes on This Apple Supplier

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

Four months back, I had turned my attention towards a company known as Fairchild Semiconductor International (NYSE: FCS) for the first time, as I believed that the stock was ready for a breakout. Today, when I look back, I see that Fairchild is stuck at the same place and signs of a breakout are no where in sight.

What Gives

The company posted dismal third-quarter numbers last month. Revenue dropped 11% to $358.8 million while earnings went down 31%. The results missed consensus estimates by a mile and the outlook it issued for the fourth-quarter was downright bad. A slowdown in the PC market has been Fairchild’s undoing, which isn’t surprising.

For example, chip behemoth Intel (NASDAQ: INTC) had also reported a weak third-quarter last month. Its revenue had declined 5.5% while net income fell 14%. In addition, the chipmaker said that its fourth-quarter will also be tepid owing to weak economic conditions. However, the truth is that a shift in consumer preference away from PCs to smartphones and tablets is hurting Intel, and the company’s failure to make significant forays into mobile devices is dragging its prospects down.

Mobile is the Way Forward

This is where Fairchild is different. The company might be facing a slowdown in its computing business, but it is focusing on its mobile business more and growing it impressively. In the previous quarter, Fairchild ignored some low-margin computing orders in order to keep its gross margin intact, and instead it grew its mobile business to 29% of total sales from 23% in the second-quarter.

The last time when I had written on Fairchild, I had told you that there was a possibility that it would be supplying chips to Apple’s (NASDAQ: AAPL) upcoming products. And this possibility turned out to be true, as evidenced by teardowns of the iPad and the iPad Mini. Fairchild has 5 chips in total inside the two new iPads, and this is very impressive. While how much Fairchild is making on every unit of the iPads is unclear, a growing presence inside Apple’s products is a benefit that one cannot ignore.

The new iPads had a record breaking first weekend, and they feature heavily on the wish lists of consumers this holiday season. Hence, presence inside a successful product would be hugely beneficial for Fairchild over the long run as it shifts its focus from PCs to mobile.

Fairchild aims to win more designs at top smartphone and tablet makers, and its cutting edge power solutions might help it do just that. The company’s power conversion solutions are efficient and consume less power, while they come in a small form factor at the same time which is a big plus.

Improvements Across the Board

Moreover, as mentioned earlier, Fairchild is focusing more on high-margin businesses. And the results were there to see, as the company’s gross margin improved 90 basis points on a sequential basis to 33.5% in the previous quarter. Its overall cost management is also improving, driven by better inventory management. Also, management states that the company’s industrial and automotive business, which accounts for half of its top line, is getting back on its feet.

Final Words  

Fairchild might prove to be a good investment if you are in it for the long haul. It is shifting its focus to mobile and its products are finding good traction. As far as other businesses are concerned, they should get better with the economy. Fairchild might experience some pain in the short-term, and an expensive trailing P/E of 27.26 might discourage you from jumping onto the stock. However, analysts expect Fairchild to deliver significant improvement next year, as shown by a forward P/E of 17.

In case you are apprehensive about where Fairchild is headed, and would wish to see how it performs a couple of quarters down the line, you can add it to your Watchlist by clicking here.    

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend Apple and Intel. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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