All this led me to believe that the company was in for some good times. Well, the good times did follow as Fairchild Semiconductor Intl Inc (NYSE:FCS) gained traction and its shares were up going into the recently released second-quarter report. I was expecting the company to do well and keep its momentum intact. But what followed was something that I hadn’t expected.
Faltering once again
Fairchild Semiconductor Intl Inc (NYSE:FCS) shares fell around 10% as the company failed to satisfy consensus estimates on both the top and bottom lines, and the miss on both counts was a wide one. With regards to guidance, Fairchild Semiconductor Intl Inc (NYSE:FCS) disappointed investors. Its revenue outlook of $355 million to $370 million was woefully behind the analyst estimate of $388.2 million at the mid-point.
The company has been facing margin challenges and it failed to achieve its expected gross margin range of 30% to 31% by a whisker. In addition, Fairchild Semiconductor Intl Inc (NYSE:FCS) found itself in a precarious situation as its major mobile clients slowed production while the inherent weakness in the PC market continued to weigh on the company’s performance.
So, with the stock down close to 11% so far this year and an already terrible outlook in place, can things possibly get any worse? Looking at the shakiness in its Mobile, Computing, Consumer, and Communication (MCCC) segment, I would advise that investors exercise caution and be patient.
The sticking point
While Fairchild Semiconductor Intl Inc (NYSE:FCS) probably counts both Samsung and Apple Inc. (NASDAQ:AAPL) as customers, both of them are probably responsible for the company’s diminished outlook. Management stated that weakness in the mobile segment was a result of reduction in orders by two large mobile customers.
This is not surprising. Earlier in July, Samsung missed earnings estimates as doubts over the strength in sales of the Galaxy S4 started floating about. Samsung suppliers have struggled as sales of the Galaxy S4 are coming in short of expectations. Doug Freedman, analyst at RBC Capital Markets, opined that Samsung built a good number of phones but wasn’t able to move enough off the shelves. As such, it underwent an inventory correction.
So, as Samsung cut down on orders, it became quite obvious that Fairchild would stand to lose as its sorry outlook confirms. Moreover, as we head into the holiday season, I’m not sure Fairchild would receive more orders for components of the Galaxy S4 since the handset has already been on the market and it looks like a good number of units are still unsold.
Similarly, Apple Inc. (NASDAQ:AAPL) is also in a transition phase as it prepared its next generation devices. However, the September quarter is ideally a good one for Apple Inc. (NASDAQ:AAPL) suppliers, and it wasn’t surprising when Fairchild’s management stated that business from one large customer will help its mobile revenue. Rumors suggest that Apple Inc. (NASDAQ:AAPL)’s next iPhone, the purported 5S, is set for a launch next month, and as Apple Inc. (NASDAQ:AAPL) ramps up production, Fairchild expects better revenue from this account.
Adding to the regular iPhone lineup would be a rumored “iPhone 5C,” or a cheaper version of the device. And throw in the upcoming iPads (both the regular one and the mini), which used five Fairchild chips last year. So there is no doubt that the company’s Apple Inc. (NASDAQ:AAPL) account is going strong. However, the massive gap between guidance and the estimate for the ongoing quarter suggests that Samsung’s production cuts played a very big role.
So, the mobile segment, which had brought in 27% of revenue a couple of quarters back, is under pressure and might not bounce back as Samsung’s next Galaxy flagship is some time away.
Not all is bad
However, a look at the other important segments of the company — industrial and automotive — will make it clear that all is not lost. The company is seeing robust demand in industrial and appliance end markets as they grew 15% on a sequential basis from the previous quarter. Demand was strong across all industrial end-markets and the company expects the good times to continue.
Similarly, the automotive end-market has been on a roll and it achieved record revenue. The segment is expected to perform well in the ongoing quarter as well. This is expected since Fairchild’s power module solutions for electronic power steering will be fitted into a bunch of vehicles as auto sales remain strong in the U.S.
Final words
Thus, it looks like weakness from one customer has forced Fairchild to tread cautiously and issue conservative guidance. Did Fairchild low-ball its guidance? We’ll get the answer to that question in the next quarter, but it should be taken into account that the industrial and automotive business, accounting for around three-fifths of the company’s revenue, are doing well.
All in all, it can be summed up that two of its businesses are running well while the third is in neutral. But, if strength returns to mobile, which might happen if Samsung’s strategy of flooding the market succeeds, then all of Fairchild’s businesses would be running at full speed. So if you are invested in Fairchild and thinking about what to do with the shares, then being patient might be the correct course of action.
The article An Underperforming Stock That You Shouldn’t Sell originally appeared on Fool.com and is written by Harsh Chauhan.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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