The STM pig has NOK as its largest customer.
Analysis prepared by Equity Analyst J. Crawshaw, CFA on Apr 26, 2012, when the stock traded at $5.93.
Highlights
ä We are forecasting a 10% decline in sales this
year, given softness its Wireless division, but a
return to growth in 2013 as new products gain
traction.We believe the Automotive, Consumer,
Computer & Telecom Infrastructure division
and General Industrial will see a decline in
2012. However, we think the Wireless division,
formed by the merger of the wireless chip businesses
of NXP, Ericsson and STM, and which
has suffered a signficant organic contraction in
2010 and 2011, will finally start to grow in 2013
as new products are designed into new handset
customers while the negative effect of exposure
to Nokia is less of a drag.
ä We look for gross margins to remain around
35% in 2012, as higher fixed cost loading in
Wireless is offset by lower fab utilization in the
other divisions.We believe operating costs will
remain stable, so STM should see EBIT margins
improve slightly in 2012. All told, we look for
EBIT margins of -7% in 2012.
ä After adjusting for Ericsson's share in the losses
of the Wireless joint venture, we forecast an
80% decline in adjusted diluted EPS in 2012.
However, we expect 40% growth in 2013 as
Wireless finally starts to turn around.
Investment Rationale/Risk
ä STM operates in a highly fragmented market,
and while we consider it to have a strong position
in certain niches, we think it is too thinly
spread across product categories. Consequently,
EBIT margins are low and ROIC is below the
cost of capital. Deconsolidating and selling the
flash memory arm and merging the wireless
business with that of NXP and Ericsson have
been positive steps, in our opinion, but risks remain,
not least that streamlining the wireless
businesses is likely to take longer and may yield
fewer synergies. While STM plans to realize
cost savings and increase efficiency, it is largely
reliant on an increase in Wireless sales to
reach profitability, in our view. The inclusion of
STM's chips in new smartphones from HTC and
Motorola is encouraging, although its exclusion
from the Apple and Windows ecosystems is a
concern.
ä Risks to our recommendation and target price
include stronger PC and wireless handset demand;
better than expected uptake of new
wireless products; and reduced price pressure.
ä Our 12-month target price of $5.50 is based on
our DCF analysis, assuming a terminal growth
rate of 3.0% and aWACC of 10.2%.
Business Summary April 26, 2012
CORPORATE OVERVIEW. STMicroelectronics (STM), a leading global semiconductor manufacturer and
the largest European semiconductor manufacturer, designs, produces and markets a broad range of semiconductor
integrated circuits (ICs) and discrete devices. The product portfolio covers all major categories
of semiconductor devices: analogue, digital and mixed signal, dedicated ICs, microprocessors and semicustom,
memories, standard ICs and discretes.
By geography, EMEA (Europe, Middle East and Africa) accounted for 24% of revenue in 2011 (based on location
of order shipment), the Americas 14%, an Asia 62%. STM's main customer is Nokia (accounting for
around 10% of sales in 2011), and its main market is telecoms (27% of 2011 sales), with the remaining sales
split over automotive (17%), computer (14%), consumer (10%) and industrials (9%). The remaining 23% of
STM's sales are through distributors.
STM reports its sales and operating income in three major segments: Automotive, Consumer, Computer &
Telecom Infrastructure (ACCI), Industrial & Multi-Segment (IMS), and Wireless. ACCI produces application-
specific semiconductors for hard disk drives, printers, consumer set-top boxes, DVD players, audio
devices, and automotive applications, generating 41% of sales in 2011 and an operating margin of 9%. The
IMS group (42% of sales) includes all discrete and standard ICs together with standard microcontrollers
and industrial devices. In 2011, the division generated an operating margin of 18%. Wireless (16% of sales)
develops chips for mobile phones. In 2011, the division generated an operating margin of negative 52%.
COMPETITIVE LANDSCAPE. The semiconductor market is large but highly fragmented and intensely competitive.
As a result of STM's extended product portfolio, its main competitors range from the mobile
telecommunications specialists Qualcomm, Texas Instruments, Broadcom, Samsung and Freescale to other
broadline semiconductor manufacturers such as NXP and Infineon as well as niche specialists such as
Conexant in the broadband market. STM is currently the second largest mobile semiconductor vendor by
revenues, behind Qualcomm. In the Industrial segment, STM claims to be the market leader supplying microcontrollers
and MEMS to a variety of customers, including Siemens and GE. In Automotive, STM claims
to be the world's third largest chip supplier with customers such as Denso and Bosch. In the consumer
category, STM has a leading position in set top boxes and a smaller position in LCD TVs.
IMPACT OF MAJOR DEVELOPMENTS. In March 2008, STM completed the spin-off of its flash memory
business (NOR and NAND flash memory) to Intel in exchange for a 48.6% equity ownership stake and
$155.6 million of long-term subordinated notes. In February 2010, Micron agreed to buy Numonyx, thereby
completely eliminating STM's exposure to the highly volatile and capital-intensive memory business. In
February 2009, STM completed the merger of its wireless chip JV with NXP and the mobile platform division
of Ericsson. The combined entity, consolidated in STM's accounts, is 50% owned by STM and 50% by
Ericsson.
FINANCIAL TRENDS. STM increased sales (excluding memory) by a compound annual growth rate (CAGR)
of 8% from 1998 to 2011, mainly organically. Over the same period EBIT margins before exceptionals have
averaged 6.5% with a trough of -9% (2009) and a peak of +23% (2000). Including restructuring charges and
impairments, reported operating margins averaged 3.8% over the same period with a trough of -12% (2009)
and a peak of 23% (2000). |
