Five Questions Infineon Fans Should Ask About Its Prospects
THE WALL STREET JOURNAL 3 March 2000
For a rookie, Infineon acted like a champ.
The former semiconductor unit of German conglomerate Siemens roared beyond forecasts for its fiscal second-quarter results last week, its first report since going public in March. Sales rose 57% to 1.53 billion euros ($1.40) in the quarter ended March 31. The company had earnings before interest and taxes, or EBIT, of 253 million euros, up from virtually nothing a year earlier. Margins, a headache for the company in years past, looked better. The company, which gets a third of its business from commodity-memory chips, weathered a slowdown in the first quarter much better than expected.
Analysts cheered. Investors bought. The stock leapt. Flowers bloomed.
Shares of Infineon now trade at 77 euros or over 80 times the fiscal 2000 Credit Suisse First Boston earnings estimate of 95 European cents a share. With semiconductor stocks at records, Infineon trades at around seven times projected fiscal 2000 sales.
But it is in the nature of Heard in Europe to wonder: Is this as good as it gets? So here follow five questions and some grumpy answers about Infineon's prospects.
Is Siemens cutting the umbilical cord?
Siemens still has about 71% of Infineon stock. Siemens has said it is going to sell the entire holding eventually, and it is supposed to reduce its stake to a minority position by next year.
There's been some speculation in the market that Siemens might sell more this year, sooner than expected. That's a continuing source of overhanging selling pressure on the chip maker.
More important, by selling, is the parent signaling that it sees a top in the chip market? A Siemens official declined to comment on the timing of sales. He says: "Our plans to withdraw are strategic and are not meant as a indication for Infineon's share price."
Is Infineon's still-close relationship with Siemens a negative on balance?
Siemens is Infineon's biggest customer, accounting for about 15% of sales in 1999. An additional 21% of sales was distributed through Siemens last year. Warburg Dillon Read estimates that the distribution percentage will drop to 5% in fiscal 2000, but that still leaves Infineon highly reliant on business from Siemens. In tough times, those ties could shore up Infineon's results.
But Infineon's cozy relationship with Siemens also could put off other customers who see Siemens as a rival. For instance, Nav Sheera, an analyst at Salomon Smith Barney who is generally bullish on Infineon, says the company doesn't sell as many telephone chips to Nokia and Ericsson as it should ideally.
When will the semiconductor makers kill the memory-chip boom?
Happens every time. Demand rises and chip makers rush to build plants. The industry then has excess capacity, and prices tumble. Memory chips are a commodity business and last time the cycle busted, in 1998, things were ugly for Infineon.
After slumping late last year and early in 2000, memory-chip prices have sprung back as corporations began buying more computers.
To be bullish on Infineon stock, you have to think the boom cycle has got legs. About one-third of Infineon's business comes from memory chips. Salomon Smith Barney's Mr. Sheera says the most optimistic estimate for growth in the memory business is 35% annually. But semiconductor equipment orders are growing at 120%, he says.
Translation: Production capacity is growing faster than demand. Mr. Sheera gives the cycle perhaps a year and says he will be on alert in the coming quarters.
Not so, contend other analysts. Credit Suisse First Boston's Jean Danjou, another bullish analyst, thinks that the memory-chip makers are much smarter than in the past. They haven't been aggressively increasing capacity, which means that the DRAM upturn could be stronger and longer than expected, he says.
A company spokeswoman said Infineon doesn't comment on the growth outlook for specific sectors, but reiterates that Infineon as a whole expects to have revenue growth that is faster than the industry average.
If there is a year left in the cycle, investors will pile out much earlier. Give the stock maybe six months.
Is Infineon big enough in memory chips anyway?
The top-three memory-chip makers had about 20% each of the market last year. Infineon, which was sixth according to Phoenix-based research firm Semico Research, had about 10% last year, though it's growing fast. Is that enough to meaningfully benefit from a rise in prices?
Why aren't operating margins better?
Infineon's operating profit margins cheered analysts in the second quarter. Some analysts expected operating margins of 8%, but Infineon hit 11% in the fiscal second quarter. That's way up from the 1.9% logged in fiscal 1999.
Sounds good, except look at the competitors: ST Microelectronics has operating margins of 17.5% in the first quarter and Philips' chip division's were 16.8%. (Both have virtually no memory-chip business but compete with Infineon in other areas like telecommunications components.)
Both research and development spending and marketing expenses have hurt margins. The company has had to spend to catch up with competitors.
Again, the stock trades at a multiple that indicates the market is discounting the margin issue.
For those with an infinite appetite for Infineon, these are questions worth answering. |
