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Stock Analyst Update

We Like Infineon's Prospects

The narrow-moat company raised its revenue and margin forecasts, thanks to healthy demand across most end markets.

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On March 24,  Infineon (IFNNY) raised its revenue and adjusted operating margin forecasts for both its fiscal second quarter and all of fiscal 2017, thanks to healthy demand across most end markets. We remain encouraged by the raise and continue to like the firm's prospects within the automotive sector in particular. We will raise our fair value estimates for Infineon to EUR 17 per share and $18 per U.S. ADR (based on an exchange rate of 0.926 as of March 24, 2017) and maintain our narrow moat rating for the company. However, with shares rising nearly 10% on the firm's rosy outlook offered by Infineon, we still view shares as modestly overvalued.

For the fiscal second quarter ending in March, Infineon now foresees 8% sequential revenue growth, up from the firm's prior outlook of 3%-7%, while adjusted operating margin should come in at 17%, up from a prior forecast of 15%. For all of fiscal 2017 ending in September, Infineon now expects 8%-11% annual revenue growth, up from a prior forecast of 4%-8%, along with a 17% adjusted operating margin, up from 16%. Each of the company's updated targets are modestly above our prior expectations for the firm.

Infineon cited strong broad-based demand out of its distribution channel and a book-to-bill ratio of 1.2 in the quarter, which implies an acceleration in near term orders. The firm is also seeing good momentum in automotive, especially within China and for active safety and electric drivetrain applications. Infineon's active safety revenue is up about 60% year-over-year and looks to be firing on all cylinders. The firm will also modestly raise its capital expenditures in fiscal 2017, partially to invest in equipment to build silicon carbide-based power semiconductors, which appear to be a promising opportunity for both Infineon and its rival, STMicro, in automotive power semiconductors used in electric vehicles. 

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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.