This Solid Semiconductor Stock Is Worth a Look

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

When I’d first taken a look at Fairchild Semiconductor International (NYSE: FCS) almost six months ago, I was convinced that it would turn out to be a good investment. Since then, the stock has gained almost 20% and there are signs that it could do even better going forward.

Holding steady

Fairchild’s recently-reported fourth-quarter results weren’t spectacular, as it missed top line estimates and met on the bottom line. Revenue of $333.4 million was 2% lower than last year, while adjusted earnings of $12.3 million or, $0.10 per share, were significantly lower than $32.3 million, or $0.25 per share, posted last year.

Sales of auto and mobile solutions were lower in the quarter due to seasonality, but Fairchild witnessed an improvement in demand for industrial and appliance products. Also, the company focused on cutting costs and keeping inventories lean in order to minimize the impact of lower sales on its gross margin. As a result, gross margin declined by just 20 basis points from the year-ago period. Also, things look better from here onwards.

The road ahead looks promising

Fairchild’s revenue guidance for the current quarter is between $330 million and $350 million, almost at the mid-point of Street estimate. This signifies that the company is expecting a sequential improvement in revenue, reversing the trend of sequential declines seen in the past two quarters. Fairchild’s positivity is driven by improved bookings, which were at a higher level in the previous quarter.

According to management, order rates are improving, the book to bill ratio is solid, and demand for industrial and appliance products is also moving up. Also, its automotive business is sitting on a strong order backlog and is set to grow in the current quarter.

Mobile growth to drive revenue

Fairchild also expects its mobile business to get better this year. It should be noted that the company supplied a total of five chips to Apple’s (NASDAQ: AAPL) iPad mini and the fourth-gen iPad. The iPad’s growth outpaced that of the iPhone in Apple’s latest quarter, which bodes well for Fairchild given its placements inside the tablets. Also, Apple is ramping up production for the iPad mini after a supply constrained quarter and this could be one of the reasons driving Fairchild’s revenue sequentially higher.

It appears that Fairchild has recorded some more design wins as it expects sales of new products to improve “especially in the second half of the year.” Thus, it seems that even Fairchild is expecting solid revenue growth towards the end of the year in the manner of Apple supplier Cirrus Logic (NASDAQ: CRUS).

In the early part of last year, Cirrus’ management had said that they expect to “transition to a sharply higher level of revenue beginning in the September quarter.” And it did turn out to be that way, as Cirrus’ revenue in its recently-reported quarter jumped an astronomic 153% from the year-ago period. Thus, this subtle hint from Fairchild indicates that it might witness solid revenue from mobile, which had accounted for 29% of total revenue two quarters back and looks set to get better this year.

The bottom line

With improvements in sales expected across the board, the chances of Fairchild appreciating further this year seem strong. Its mobile business has been progressing rapidly while industrial and automotive are also set to improve. Moreover, the company’s cutting-edge power conversion products deliver efficiency at low costs and are helping it to gain market share. All these factors make Fairchild an intriguing investment option with a forward P/E of just 14 times as against the trailing P/E of 80.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Cirrus Logic. 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!

blog comments powered by Disqus