International Rectifier: Who Needs Nasdaq?
biz.yahoo.com
Monday May 1, 9:00 am Eastern Time
Individual Investor International Rectifier: Who Needs Nasdaq?
Senior Analyst Luciano Siracusano (5/01/00)
Earnings drive stock prices.
It's a fundamental of investing that some shareholders have forgotten in the
current environment, where a few of the best performing stocks had no
earnings, nor any immediate prospects for them.
But one of the nice things about investing in companies recording
spectacular earnings growth - and that are expected to grow their bottom line
at rapid rates - is the reasonable expectation that the stock will make you
money barring some natural calamity.
One such stock is International Rectifier (NYSE:IRF - news).
Never heard of it?
That's because it's been making its steady climb up the charts in a quiet,
deliberate way, well secluded among the more pristine equities of the Big
Board.
But make no mistake. This ain't your daddy's average New York Stock
Exchange selection. It has juice.
The company's shares have already gained more than 400% over the past 12
months, fueled by the semiconductor industry's spectacular revival and the
ever-greater need for integrated solutions that maximize power in electronic
devices. Power management has moved from obscurity to center stage, as
makers of cars, computers, cell phones and servers race to create smaller,
lighter, faster products.
International Rectifier had been a supplier of low-margin power supply
products, but in the past few years the company has reinvented itself by
creating proprietary technology used in semiconductors for power
conversion.
The company's products provide an even, usable flow of electrical power for
electronic equipment and increasingly, communications devices. The
information technology market now accounts for 54% of the company's sales.
For example, the company is a market leader in power MOSFETS, or metal
oxide semiconductor field effect transistors. The devices are used to improve
the performance and energy efficiency of electronic circuits, and they show
up in automobile anti-lock brakes, industrial test equipment, telephone
networks, modems and satellites.
The company's analogue power integrated circuits and other components
enable Internet hardware to gain speed and reliability, allow portable
electronics to run longer on a single battery charge, improve automobile
efficiency, and cut energy consumption in home appliances and industrial
motors. Some applications powered by International Rectifier technology
include routers, servers, wireless phones, portable computers and game
consoles.
The company has shredded analyst's earnings estimates for the past three
quarters, as it earnings growth has accelerated with the introduction of new
products. The growth led the company to earn $0.38 per share, ten cents
above expectations, and 65% above December earnings of $0.23, in its most
recent quarter.
Current estimates call for the company to earn $1.20 per share for the full year
ending in June, and $2.18 for next year. Both forecasts have been revised
upward by roughly 20% in the past month. The year-ahead multiple stands at
roughly one-fourth the company's year-ahead growth rate, and below its
expected growth rate for the next three to five years.
We expect International Rectifier's metamorphosis to continue in the year
ahead. The company increased sales 44% in its most recent quarter to $198
million and is on track to do about $750 million for the full fiscal year, versus
$545.5 million in the June 1999 fiscal year.
Revenue growth is being driven by the introduction of new products, as
pricing remains stable. The company's proprietary products are being
integrated into some key next-generation applications, which will increase
revenue and margins and fuel share profit growth, which is projected to grow
more than twice as fast as the industry average over the next 12 months.
The company has not identified all of its major clients, but one, a supplier of
cell phones, selected a line of International Rectifier's new advanced circuits
for its latest generation digital phones. This program is scheduled to begin
production this summer.
The company has also received a ``multi-million dollar'' design win for
next-generation hardware that offers broadband capabilities (which will
include video traveling along voice lines). Production will begin in the fall.
Third, the company's power systems are being integrated into this year's auto
designs, which need International Rectifier products to power the conversion
to electric steering. The latest models are replacing hydraulic steering with
electric steering systems that reduce the weight and the drag on the engine,
saving about two miles per gallon in gas.
The company believes its other components can help to save an additional 3
miles per gallon. Management forecasts that the $10 per car worth of
components it sells today will rise to $100 per car by the end of the decade.
(Automotive sales account for roughly 15% of current revenue).
Overall, proprietary products will account for roughly 30% of revenue by end
of the June fiscal year.
While much of the industry remains capacity constrained, International
Rectifier is enjoying lead times that exceed industry averages. Most
companies need 8 to 30 weeks on average to deliver orders. International
Rectifier is doing it in 4 to 18 weeks. Factory utilization climbed to the
mid-80% range in the March quarter, and the company expects utilization
rates to hit the high-80% range for fiscal 2001.
Management is guiding analysts to expect 30% to 35% revenue growth for
fiscal 2001, with gross margins swelling to the 45% to 50% range.
The balance sheet is strong, with more than $200 million in cash. The
company recently sold some 9 million shares, using the proceeds of the
secondary to virtually wipe away its long-term debt, which now stands at $5.3
million from $158 million a year ago.
It takes a strong stock to make new highs in the current market environment.
With a market cap of about $3 billion, International Rectifier is doing just that,
hitting $50.50 intra-day on Friday. Although it closed the session with a $0.50
loss at $49.
Like other power management plays among our America's Fastest Growth
Companies Stock of the Day selections, including Powerwave Technologies
(NASDAQ:PWAV - news) and Power-One (NASDAQ:PWER - news),
International Rectifier has emerged from the recent slaughter on Wall Street to
set all-time highs at a time when many high-fliers are still 40% to 50% below
their March peaks.
Bottom Line:
This is a solid company with strong fundamentals. Once tech investors realize
this Big Board stock sports Nasdaq-type growth, it will no longer be a
well-kept institutional secret.
For more in-house professional stock analysis and commentary, visit us at
Individual Investor Online. |
