You'd think "power management" would be a hot phrase on Wall Street, what with high energy prices sending utility costs through the roof. But the stock of power management company International Rectifier (NYSE:IRF) is just above its 52-week low. Is Wall Street missing something?
It's not missing the bad news. The company's latest financial outlook, for the quarter just ended, shows project sales down 3% from the previous quarter. That's well below what the company projected at the end of July -- flat sales to 4% growth -- and it is slightly below what analysts expected.
Gross margins won't win the company any fans, either. July guidance showed that gross margins would fall within a range of remaining flat to falling by 2%, but now they're expected to fall by 3% when results are announced on Oct. 27. GAAP earnings are expected to be between $0.35 and $0.37 a share. That's down from the $0.53 earned in the comparable quarter a year ago.
A year ago, sales were booming, and the company was starting to see the benefits from a $240 million restructuring that was started at the end of 2002. The goal was to de-emphasize the commodity business and accelerate the move to proprietary products. One important goal was to use lower-cost manufacturing facilities to improve gross margins. So the lower gross margin is as big a disappointment as is the missed revenue target, and it raises questions about whether the company was able to execute on its restructuring/goals.
Equally disappointing is the company's claim of product mix problems. You have to wonder whether the restructuring left the company inflexible and capacity constrained when an increase in the order rate at the end of the September quarter was not able to be turned into revenue quickly. The company says it has more capacity coming online and expects sales to be up in the current quarter, but it offered no specific guidance.
Competitors Fairchild Semiconductor (NYSE:FCS), STMicroelectronics (NYSE:STM), and Vishay Intertechnology (NYSE:VSH) all are experiencing problems with revenue growth. So, for now, the flat revenue forecast shouldn't send investors running for the exits.
Analysts expect International Rectifier to compound earnings at a 15% annual rate for the coming five years. But I'd say that at 18 times earnings, the growth is already priced into the stock. And I wouldn't call Wall Street wrong for discounting this company, since it misses its gross margin targets and fails to meet revenue guidance.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.
