Littelfuse Earnings: 2023 Is Looking Bumpy, but Shares Still Present Upside for Long-Term Investors

We trim our fair value estimate for narrow-moat Littelfuse LFUS to $310 per share, from $318, after it missed second-quarter profitability guidance and as the third-quarter outlook came in below our expectations. Littelfuse continues to see soft demand with customers working down elevated inventories built up during surging post-pandemic demand. These effects are particularly noticeable in Littelfuse’s consumer and communications businesses, but are emerging in the heavy vehicle market as well. First-quarter results showed lessened effects that gave us optimism, but second-quarter results and third-quarter guidance below our model show that market dynamics continue to be bumpy. Longer term, we continue to have confidence in Littelfuse’s strong position to benefit from electrification across its served markets, and in its stickiness with customers. Shares sold off an excessive 11% after the call, and we see upside at current levels.

Second-quarter sales dropped 1% year over year to $612 million and were flat sequentially. Littelfuse’s electronics segment drove the weakness, but commercial vehicle sales were soft as well. The very broad electronics segment contains some consumer and communications exposures that are undergoing soft demand and inventory corrections this year. Transportation sales dipped 5% year over year but rose 3% sequentially. We believe the year-over-year decline was led by softening demand for commercial vehicles. We view the auto market as healthy for components suppliers, with production relatively flat compared with 2022.

Non-GAAP operating margin dropped 220 basis points sequentially to 16.8%, with weaker volumes. Transportation profitability has been a weak point for Littelfuse in 2023, with operating margins stagnating around 5% in the first half, well below our view of a healthy level in the low teens. We expect margins to improve with rising volumes, as the transportation segment has a decent amount of operating leverage.