Littelfuse Earnings: Soft Pockets Remain, but Our Long-Term Expectations and $310 FVE Are Intact

We maintain our $310 fair value estimate for shares of narrow-moat Littelfuse LFUS after its third-quarter results met our expectations. The firm’s fourth-quarter guidance missed our model, but we continue to expect results to begin a recovery in 2024 and grow meaningfully in 2025. Littelfuse continues to see customers moderating orders as they work through existing inventories, and weaker end demand in markets like industrial equipment, heavy vehicles, and consumer applications. Long term, we continue to see the firm as a beneficiary of secular trends toward electrification and higher voltage, and we expect it to outperform its end markets during a rebound due to content growth. We see shares as undervalued.

Third-quarter sales dropped 8% year over year and 1% sequentially to $607 million. Littelfuse’s end markets were a mixed bag. In transportation, heavy vehicles have been weak, but automotive growth was a bright spot. In electronics, the firm’s power semiconductors did well while its more consumer-facing products saw poor demand. Industrial equipment has been broadly weak, mirroring what we see at other electronic components suppliers.

Gross margin dropped 100 basis points sequentially to 37.4%, and non-GAAP operating margin dropped 30 basis points sequentially to 16.5%, which is a subpar level for Littelfuse. Margins are being pressured by lower volumes in 2023, but we expect a rebound to accompany top-line growth.

Fourth-quarter guidance came in well below our model. A sales midpoint of $535 million implies a 12% sequential drop, which is more than typical seasonality in the high single digits. We expect ongoing weakness in industrial equipment, heavy vehicles, and consumer applications, and think some of these markets are still not bottomed out. Littelfuse is guiding for growth in 2024, which we think will be modest and include a softer first half. We expect a more meaningful rebound in the second half of 2024 and into 2025.