STMicroelectronics Calls for a Bright 2017 as the Turnaround Story Continues; Raising Fair Value
11:40 AM ET 1/26/17 | Morningstar
| RELATED QUOTES | | |  | | 2:22 PM ET 1/26/17 | | Symbol | Last | % Chg |
STM
| 13.00 | 6.73% | | Quotes delayed at least 15 minutes | | |
STMicro reported solid fourth-quarter earnings and strong gross margin expansion beyond our prior expectations but, more important, gave investors a bright outlook for its first quarter and the second half of 2017 based on a new design win that we suspect was obtained within Apple's upcoming iPhone. We will raise our fair value estimates for ST to $9 per U.S. ADR and EUR 8.50 per share and maintain our no-moat rating, but we still view shares as fundamentally overvalued.ST's revenue in the December quarter was $1.86 billion, up 11.5% year over year and 3.5% sequentially, at the midpoint of the firm's forecast range of 0%-7% sequential growth as discussed in October. The firm's analog and MEMS sensor business fared best, up 8% sequentially, thanks to sensor content within leading smartphones like the iPhone and Android based models in China. Broad-based microcontroller sales were up 4% sequentially while automotive revenue was up only 2% sequentially but a still-healthy 12% year over year. The bigger news was the firm's gross margin expansion of 170 basis points to 37.5%, ahead of the firm's guidance of 37%, thanks to manufacturing efficiencies and a richer product mix. In all, ST's operating margin expanded by 190 basis points to 6.9%.
For the March quarter, ST expects revenue at the midpoint to fall 2.4% sequentially, which we think is a relatively bright forecast in light of normal seasonal headwinds and would represent about 12.5% year-over-year growth. Further, the company referred to a "newly won program to ramp with substantial revenues in the second half of 2017." Given management's unwillingness to divulge further details, we suspect that the design win is in the next Apple iPhone, which is likely the only product launch that can move the needle for a firm like ST. Nonetheless, we like the firm's ongoing gross margin expansion and growth opportunities in automotive but believe these rosy prospects are already baked into ST's share price today. |
