Predictably, Fairchild Semiconductor's (NYSE: FCS) third-quarter results came in ahead of analyst estimates. Like other semiconductor companies, it benefited from improving customer demand and inventory restocking. This led to a sequential increase in sales and profit margins.
Fairchild had third-quarter sales of $331.8 million, up 19% percent from the second quarter, but down 23% from the third quarter of 2008. The company reported adjusted net income of $14.9 million or $0.12 per diluted share, which was up from a loss of $0.03 per share last quarter and $0.06 per share better than analyst estimates.
Management noted that "order rates were solid throughout the quarter across a broad range of end markets, enabling us to increase our backlog position from a quarter ago." The company now expects to have fourth-quarter sales of $333 million to $343 million.
Despite the company's better-than-expected third-quarter results and bullish outlook for the fourth quarter, the market was not impressed. Fairchild's shares fell by more than 9% on the news.
What spoiled the party?
The answer is twofold. First, industry heavyweight Intel (Nasdaq: INTC) already raised the expectations bar for the semiconductor industry with its strong third-quarter report. Second, Fairchild's third-quarter gross margin was 26%, up from 23.2% in the second quarter, and management anticipates a fourth-quarter gross margin of 28% to 30%. While that should be a positive for Fairchild's business, it may not be for its stock price. That's because Fairchild's gross margin has peaked around 30% in the last five years. The company appears to be running a lean operation, and now comes the tricky part of growing revenues and growing revenues back to pre-crisis levels.
Lastly, Fairchild is trading at 13.6 times next year's consensus earnings estimates. While this P/E multiple is relatively low when compared to its peers, it does leave little room for error for a company that will have a difficult time expanding its profit margins in 2010.
|
Company
|
CAPS
|
Forward P/E
|
5-Year EPS Growth %
|
|
Analog Devices (NYSE: ADI)
|
****
|
21.7
|
15.0
|
|
Fairchild Semiconductor
|
***
|
13.6
|
-2.6
|
|
Linear Technology (Nasdaq: LLTC)
|
****
|
18.5
|
14.8
|
|
National Semiconductor (NYSE: NSM)
|
**
|
16.1
|
9.4
|
|
Texas Instruments (NYSE: TXN)
|
***
|
14.9
|
12.6
|
Source: CAPS and Yahoo! Finance.
Add in uncertainty about future growth, and Fairchild looks to have gotten a bit ahead of itself. Any Fools beg to differ? Drop a line in the comments box below.
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