FBR Capital Markets said its recent checks suggest the revenue of Fairchild Semiconductor International (NYSE: FCS) is likely to shrink again in the fourth quarter of 2011.
Recent checks suggest Fairchild's Q4 revenue are likely to shrink again, given its sell-in revenue recognition, continuing inventory reductions in the distribution channel (especially of industrial parts), a likely decline in PC chip shipments, and with top customer Samsung (less than 4 percent to 5 percent of revenue) pursuing its year-end inventory cleanse, said Craig Berger, an analyst at FBR Capital Markets.
Importantly, management believes it is burning $5 million to $10 million out of distribution inventory in the third quarter of 2011; he expects a similar level of depletion in the fourth quarter of 2011.
Despite these near-term challenges, downstream supply chain inventory reductions are likely last through January or February only, and fundamentals should solidly improve from there. In addition, with chip stocks likely to relatively outperform other sectors in the second half of 2011, it anticipates a fundamental trough by three to five months, he said.
It is no surprise to investors either that chip firms are resetting forward estimates as the downcycle bakes into fundamentals. For Fairchild, he remains constructive on shares at current prices and still believes the firm is a better company today than in prior years, with more industrial exposure, proprietary product exposure, and more financial stability.
He said its profitable model drives a growing cash balance, a $4.00 share-price swing factor, versus late 2008. Also, business volatility (cyclical revenue, margin, or inventory swings) has declined markedly.
For the third quarter of 2011, Fairchild recently lowered its guidance due to weak distribution sell-through trends (particularly in consumer, PC, solar, industrial inverters, white goods) as downstream customers reduce inventories amid demand sluggishness and poor macro trends, and as industrial supply catches up with demand, he said.
The company's revenue should track to about $400 million to $410 million (about 5 percent to 8 percent sequential, Street estimates $404 million); gross margins should track near 36.2 percent (down 100 basis points sequential). Operating expense spending should track toward $96 million, versus previous forecast of $99 million.
For the fourth quarter of 2011, he now models Fairchild's revenue shrinking 2 percent sequential, a continuation of the distributor inventory burn that is occurring in the third quarter as another $5 million to $10 million of inventory is depleted from that channel.
We do believe industrial shipments, in particular, will be weak, with declining PC shipments, and with top customer Samsung (less than 4 percent to 5 percent of revenue) pursuing its year-end inventory cleanse, said Berger.
He now forecasts fourth quarter revenue of $399 million (down 2 percent sequential), in line with the Street. He expects gross margins to fall another 100 basis points sequentially to 35.3 percent, 30 basis points worse than the Street. Net, his $0.28 pro-forma earnings per share estimate is worse than the Street's estimate of $0.30.
The brokerage lowered its 2011 pro-forma earnings estimate for Fairchild to $1.41 from $1.45 and its 2012 estimate to $1.30 from $1.45. The brokerage also reduced its price target to $20 from $21, while maintaining its outperform rating.
Fairchild stock closed Thursday's regular trading down 6.96 percent at $11.76 on the NYSE.