In the third quarter of the year, Fairchild experienced an 11% decline in revenue compared to the same period in 2011, roughly in line with its performance in the first half of 2012. Lower sales occurred in all three major segments of the company’s business. With gross margins declining, and operating expenses down only slightly, net income dropped 31%. Cash flow from operations has been cut in half for the first nine months of 2012 compared to the same period a year ago as well.
The stock hasn’t reacted much to the company’s recent poor performance, and as a result Fairchild Semiconductor International trades at 31 times trailing earnings. Analyst consensus is that the business will improve in 2013, and so the forward P/E falls to 19, but we’d be wary of relying too heavily on the company’s results matching these forecasts- they seem optimistic, and depend on the business not just halting but in fact reversing its recent decline. We’d also note that at least statistically Fairchild is quite exposed to the broader economy, with a beta of 2.4.
Citadel wasn’t the only billionaire active in the stock last quarter, though we can’t be sure of what other funds have done since then. Fellow billionaire Ken Fisher’s Fisher Asset Management had reported a position of 5.4 million shares of Fairchild Semiconductor International at the end of the third quarter (check out Fisher’s favorite stocks). Royce & Associates, a fund managed by Chuck Royce that tends to focus on small- and mid-cap stocks, owned a little over 14 million shares (find more stocks Royce owned).
Peers for Fairchild include Analog Devices, Inc. (NASDAQ:ADI), NXP Semiconductors NV (NASDAQ:NXPI), Texas Instruments Incorporated (NASDAQ:TXN), and David Einhorn favorite Marvell Technology Group Ltd. (NASDAQ:MRVL). NXP is unprofitable on a trailing basis, while Marvell trades at 15 times trailing earnings and the other two companies have P/Es of 20. As a general rule, recent performance hasn’t been good at these companies either: net income was down over 60% last quarter versus a year earlier at Marvell and NXP and so even though the forward P/Es are quite low we think that we would avoid them for now.
ADI’s fiscal year ended at the very beginning of November 2012, and in the fourth quarter of that fiscal year its revenue and earnings were about flat compared to the fourth quarter of its last fiscal year. Wall Street analysts expect income to rise slightly in 2013, and so the forward P/E is 16. It might be worth considering, but we wouldn’t place a high priority on it as a value case would be dependent on seeing higher earnings. Texas Instruments reported substantial earnings growth in the third quarter of the year compared to Q3 2011, but revenue was down slightly (suggesting that growth on the bottom line might not be sustainable). It too is another outside possibility, but the multiples are just too high for us to get excited about the stock.
We’re not sure why Citadel likes Fairchild so much. It, and its industry really, have deteriorating financials and yet the company has a higher trailing P/E than many of its peers- quite high even in terms of forward earnings estimates. With these estimates themselves dependent on remarkable improvement in 2013, we wouldn’t buy the stock at these levels.
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