Friday, December 18, 2015

4th AIM student equity update: Infineon Technologies AG (Ticker: IFNNY): “To IFINEON and Beyond”

IFNNY (Infineon Technologies AG): “To IFINEON and Beyond”
By: Daniel Fernandez Guerra, Student at Marquette University

Image result for infineon Technologies logo

Disclosure: The AIM International Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

• Infineon Technology’s revenues have been growing at double digit levels recently. The company has become very attractive for investors as its market cap valuation continues to rise relative to its peers.

• With the acquisition of International Rectifier, IFNNY has improved its operating margin by 15%.

• The company is guiding to FY 2016 sales growth of 13% compared to FY 2015 of 8.7% growth.

• IFNNY hit an all-time 52-week high price of $15.14 on December 4, 2015. The company has increased ~40% in its value compared to the industry change of -1.6%.

Infineon Technology AG ADR (OTC: IFNNY) is performing better than ever. This past November, the company announced their Q4 2015 results. Infineon reported sales of ~2,077M (+36% YoY/1% QoQ), above market consensus. As a result, analysts have updated their estimated sales to $8.5B for FY 2016 and their profit margin to rise to $1.3B, which is ~14% higher than previous estimates.

Infineon's stock price performance has been rewarded by recent 'beats' in forecasted consensus earnings. Furthermore, investors have been compensated by outperforming its closest competitors, where IFNNY is forecasting a ~9% organic growth in FY 2016. Estimates of its peers, such as STMicroelectronics NV, NXP Semiconductors, Freescale Semiconductor Ltd. and Texas Instruments,  are estimated to produce only a small growth rates or even slight declines. Infineon’s rise in its stock price has been mainly because of strong organic growth and its outperformance versus its industry peers. Additionally, given management’s success in beating forecasts, it is expected that more upgrades can occur - rather than the risks inherent in the semiconductor industry where Infineon operates.

Infineon’s P/E multiple has had a median of 15x over the last 5 years, compared to industry average of 12x. Due to the company’s consistent growth, that multiple could experience an expansion in the future. IFNNY can benefit from two mid-term divers, which include the sales growth in the auto and industrial segments to end market exposure and by the improvement in operating margins that are linked to the International Rectifier acquisition. 

What has the stock done lately?
Infineon has changed its restructuring plan; it has been strongly managed and has shifted its focused products into key markets. The company is highly focused on growth businesses where they have a market leadership position and can benefit from the current needs of the global economy. Finally, IFNNY's management has succeeded in making a market in the chip card and security business, which has historically been a developing business that offers higher margins. Management has noticed that the shift in focus to fewer key products has paid off as it has tightened cost management efforts.

Past Year Performance: IFNNY has increased ~40% in value since it was added to the AIM international portfolio, but analysts believe that the company is still undervalued since the stock price has not fully followed its revenue and earnings growth. With the acquisition of Fairchild Semiconductor Corp., Infineon has stayed as the solitary leader in the automotive industry and remains strong in their other segments.

Source: FactSet

My Takeaway

Reinhart Ploss has done an outstanding job as a CEO at Infineon. Management has encouraged and supported a strategic focus and identified the major changes within the company - that has clearly had a favorable impact on their growth and performance. The company has consolidated as the market leader across different businesses. IFNNY will continue to benefit from their recent acquisitions and consolidation within the industry that should reward investors with new 52-week highs in 2016.

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