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Why Is This Apple Supplier an Ideal Investment Candidate?

September 02, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

1 followers

Fairchild Semiconductor International (FCS) seems to be coming back to life. This Apple supplier has come into its own this year after a slow 2013, beating the broader market handsomely with gains of 30% so far. Fairchild's recent second-quarter results were fantastic as well. The company trumped estimates, and looks set to turn in a strong performance in the second half of the year.

Solid performance

Fairchild's revenue increased 4% year over year in the second quarter to $372 million, besting Wall Street's $366 million estimate. The company's net income almost doubled year over year to $17.8 million. Its earnings per share of $0.20 were miles ahead of the $0.11 consensus. Fairchild delivered solid improvements across the board, driven by controlled capital spending, an improved product mix, and higher utilization. As a result, the company's gross margin jumped 4.3 percentage points year over year.

Additionally, Fairchild exited the quarter with a strong order book. Its order backlog was up modestly on a sequential basis, and the company is on track to improve sales once again in the ongoing quarter.

Automotive and industrial is pumping up

Fairchild's performance has been driven by strong demand in several end markets. For example, sales of its automotive solutions are on a roll, increasing 14% year over year in the second quarter. The strong demand for Fairchild's powertrain solutions, such as ignition and fuel injection power management, are key drivers in this segment, along with electronic power steering modules.

Looking ahead, the company will be launching more powertrain solutions to keep up its pace in the automotive market, which is recovering at a robust pace after the recession. According to IHS Automotive, global auto sales are expected to hit 85 million units this year, driven by recovery in key markets such as Europe and the U.S. Moreover, by 2018, it is estimated that auto sales will hit the 100-million-mark globally. As such, Fairchild should continue seeing sustained demand for its powertrain solutions.

The company is also gaining traction in the industrial market. Fairchild's Smart Power modules have increased its penetration in the industrial appliance market. In addition, its power switches, used in power inverters, are in demand from solar manufacturers.

Mobile: The next growth area

Fairchild's biggest opportunity is in the mobile market. This segment is expected to grow the fastest in the ongoing quarter, driven by product ramps at Apple. Fairchild has historically supplied analog and field-effect transistors for the iPhone, along with battery charger components. The company also supplied chips for the iPad Air and the iPad Mini with Retina display last year.

Apple's iPad sales weren't impressive last quarter, but it is trying to set that right by adding more features to the device this year. According to Ming Chi Kuo of KGI Securities (viaMacRumors), the next-generation iPad Air will be powered by an A8 processor, along with an 8-megapixel resolution camera and Touch ID. Similar additions are expected to be made to the Retina iPad Mini. Moreover, as widely reported, bigger iPhones are expected to help Apple cut its teeth into the smartphone and phablet market.

In nutshell, Fairchild looks set to benefit from an increase in production at Apple, and its outlook suggests the same. Also, Fairchild has reportedly added more Chinese handset manufacturers to its customer base. As such, it is seeing an increase in the number of reference designs as the production phase ramps up. The handset market in China is booming right now, primarily due to the deployment of 4G LTE. According to Strategy Analytics, Chinese smartphone sales will surpass the U.S. this year in terms of volumes and revenue.

Takeaway

Automotive, industrial, and mobile should continue driving Fairchild's sales. Positive trends in these end markets have helped the company improve its order book, while proper supply chain management and smart capital spending are powering its gross margin. All in all, Fairchild looks well-placed to continue beating the market due to robust demand and solid execution.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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