This Apple Supplier Is Making a Comeback, But Is It Time to Buy?

Chipmaker Fairchild Semiconductor (NASDAQ: FCS  ) wasn't in good shape at the close of 2013. Weak orders from Samsung (NASDAQOTH: SSNLF  ) , one of its biggest customers, held Fairchild back, and it was unable to make the most of its supplier relationship with Apple (NASDAQ: AAPL  ) .

The story is different this year. Fairchild has outperformed the NASDAQ Composite index with gains of almost 20% so far in 2014. The company's order book has improved significantly, it has reduced its losses, and prospects in the end-market seem strong.  All in all, Fairchild is reporting improvements on several fronts, which is why it could be a good turnaround play.

On the right track
In the first quarter, Fairchild's revenue improved slightly from the prior-year period to $344 million. The impressive part was that the company's adjusted gross margin jumped 250 basis points, year over year. Moreover, Fairchild's adjusted net income increased to $5 million in the quarter, a remarkable improvement over the adjusted net loss of $2 million in the year-ago period. 

The good thing is that Fairchild investors can expect such improvements to continue. The company recorded orders worth $375 million in the previous quarter, outpacing total revenue. In fact, the backlog increased 20% on a sequential basis, primarily driven by the mobile business. Fairchild recorded a number of design wins in Asia, mostly in mid-range devices, for its battery-charging and power-management solutions. 

Solid prospects
Fairchild landed design wins in the high-end smartphone market for voltage regulators and analog switch solutions. It also said that its chief customer is "on track to adopt a flexible adaptive battery charging solution," while other leading Asian customers will also adopt this technology going forward.

Samsung happens to be Fairchild's largest customer, according to the latest 10-K filing. If Samsung is adopting Fairchild's new power-management solution, it isn't surprising to see why the company is seeing a windfall in orders. Samsung expects to sell a total of 330 million smartphones this year, up 14% from last year. Out of these, only 35% are expected to be high-end devices, while the rest will be mid-range phones.

As Fairchild's focus is mainly on the mid-range smartphone market, Samsung's adoption of its latest technology will be a tailwind going forward.

New iPads to drive growth
Apple is another potential catalyst. Apple uses Fairchild's chips in its iPad lineup. Last year, the iPad Mini with Retina display carried a couple of Fairchild chips inside it, and it also had a spot in the iPad Air.  Although iPad sales hit a wall last quarter, a product refresh later this year will help Apple arrest its market share decline.

Apple will equip its second-gen iPad Air with Touch ID, an A8 processor, and an improved camera with an 8-megapixel resolution, according to analyst Ming Chi Kuo of KGI Securities via MacRumors. The new iPad Mini with Retina display will receive similar upgrades. In addition, the existing iPad Mini with Retina display is expected to receive a price cut, and this should spur sales of the device. All in all, Apple's iPad refreshes should breathe new life into the iPad line-up, which will be good news for Fairchild.

The automotive opportunity
Apart from mobile devices, Fairchild is finding traction in the automotive market. Automotive sales were up 14% on a sequential basis in the first quarter, driven by demand for powertrain solutions such as ignition power management and electronic power steering controllers. Fairchild is coming up with a variety of new powertrain solutions to address this market.

It exited the first quarter with strong order growth in automotive, indicating strong momentum. Auto sales in the U.S. hit a nine-year high in May, rising 11%, year over year, to 1.6 million. The annualized rate increased to 16.1 million units in May from 15.98 million units at the end of April. Strength in auto sales will continue driving demand for Fairchild's solutions.

The bottom line
Fairchild's turnaround looks set to continue. The company's results and order book paint a positive picture about the business, while the positive trends in the end-markets should help it sustain the momentum going forward. It looks like Fairchild has more upside in store.

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