Recovery seen ahead for German chip maker Infineon, sending shares soaring

By Barbara Kollmeyer

The inventory correction for auto and industrials is "showing signs of bottoming out"

Shares of Infineon AG stood out as a top performer in Europe on Tuesday, as analysts shook off another sales guidance cut from the German chip maker to focus on recovery hopes.

Infineon climbed 13% (XE:IFX), and was poised for the biggest one-day percentage gain since March 2020, according to FactSet. Shares are down around 4% so far this year, after a 32% gain in 2023. The Stoxx 600 XX:SXXP was up 0.7%.

Infineon reported second-quarter net profit of EUR394 million ($424 million), from EUR826 million a year ago, and revenue of EUR3.632 billion from EUR3.702 billion. A consensus estimate of analysts from Visible Alpha forecast profit predicted net profit of EUR397.34 million on revenue of near EUR3.60 billion.

An important gauge of profitability, its segment result margin, came in at 19.5%, with the company forecasting around 20% for 2024, from a previous low to mid-20s percentage range. That metric was 27% in 2023.

But the maker of chips for automotive, industrial and other sectors forecast full-year sales of around "EUR15.1 billion plus or minus EUR400 million," from previous guidance of EUR16 billion plus or minus EUR500 million. That followed a guidance cut in the first quarter as well.

"Many end markets have remained weak due to economic conditions, while customers and distributors have continued to reduce semiconductor inventory levels. Weak demand for consumer applications persists," said Jochen Hanebeck, CEO of Infineon, in a press releases.

Hanebeck said the auto sector had seen a "noticeable deceleration in growth," adding on a conference call that slowing electric vehicle expansion in western markets and OEMs (original equipment manufacturers) had become "more pronounced temporary headwinds."

On the flip side, the CEO spoke of "green shoots" for structural drivers such as powering artificial intelligence services. Helping ease another revenue forecast cut was news of a cost reduction program from Infineon "in the high triple-digit million euro range per year," with initial benefits expected in 2025, and full effect by 2027.

Earnings seen thus far from Europe's biggest automakers broadly show a slow start to 2024, with slower sales of new models and EVs.

But a Jefferies team led by Janardan Menon said the inventory correction for auto and industrials is "showing signs of bottoming out," therefore further cuts from Infineon would be limited, and "today's guidance could even prove conservative."

With a stronger outlook in the longer term, Menon said any share weakness should be seen as an "an attractive buying opportunity" - Jefferies rates the shares a buy.

Equally upbeat, a team at JPMorgan led by Sandeep Deshpande said the revenue outlook cut was "not anywhere near the worst year-on-year decline seen by the company, whether in 2008-09 or even 2010-11." Rival STMicroelectronic's (STM) (FR:STMPA) guidance for fiscal 2024 marks the worst decline since 2001, he noted.

And they highlighted the company's vow that the worst has been seen and improvement should begin in the June quarter. "Whether the market believes that all the bad news is in depends on the autos market behavior (in particular EVs) over the next few months as well," said Deshpande and his team, who rate Infineon neutral.

-Barbara Kollmeyer

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05-07-24 0941ET

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