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Microchip Technology Inc. (MCHP), Fairchild Semiconductor Intl Inc (FCS): This Semiconductor Company Can Bounce Back

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Fairchild Semiconductor Intl Inc (NYSE:FCS)  has been going downhill this year, with the stock down by 14%. The company’s stock has experienced two steep declines year-to-date, as its results have failed to appease Wall Street.

Fairchild Semiconductor Intl Inc (NYSE:FCS) recently declared its 2Q results. Let’s takes a look at how the most recent quarter went and what the future holds for Fairchild.

Declining business

Fairchild Semiconductor Intl Inc (NYSE:FCS)In the second quarter, overall global PC shipments fell by 10.9% to 76 million units. Sales moved south by 11.4%, which was narrower than the 11.7% contraction projected. This marked the fifth-consecutive quarter of a declining market for PCs, laptops and netbooks because more and more consumers are switching to tablets and smartphones as their preferred means to get online.

This contraction in the PC market had an impact on the company’s revenue generation, which finally managed to clock a figure of $357 million. This was about 1% lower than the year-ago quarter but it translated to 4% sequential growth. In addition, another contributing factor towards lower revenue was demand reduction from a couple of mobile customers.

Adjusted gross margins inched up by two points from the prior quarter to 30%. This was due to higher factory loadings coupled with a high-margin product mix, coming primarily from the high-voltage segment.

The adjusted net income was $2 million, which works out to earnings of $0.01 per share. 

Can it recover?

In the long term, probably yes, but it has a lot of hard thinking to do and to act upon. For the medium and short term, this stock is best stayed away from. This stock might be bought on dips and one needs to hold on for the long term. Let’s take a look at what can possibly help Fairchild Semiconductor Intl Inc (NYSE:FCS) to be in the black again and offer value for investors.

Fairchild Semiconductor Intl Inc (NYSE:FCS) can post profits in the next quarter and also increase sales volumes. However, there’s a big “if” that can be a party spoiler. If demand from Chinese mobile manufacturers slumps on account of the recent downward revision of GDP of China, then it’s tough days ahead for Fairchild.

Analysts are projecting that EPS will grow by around 5% per annum, primarily taking into consideration the following factors:

1). The power-semiconductor line posts strong results and is expected to keep growing.
2).
The 8-inch fab, which was commissioned in July in Korea, is a catalyst for cost reductions and will enable the company to stay competitive in the future.
3).
The company is planning for significant cost-cutting measures in the second half of 2013, which will make it leaner and help in increasing margins in the future.
4).
Industrial, appliance and automotive segments are going to be major growth drivers. The company has already shown good performance in these segments. Fairchild Semiconductor Intl Inc (NYSE:FCS) needs to adjust its product mix so as to increase the content of this product.

Fairchild also needs to add new customers and reduce its dependence on the mobile segment, and more so on one or two customers. Currently, Apple accounts for 10% of sales figures at Fairchild and this needs to be lowered.

The path to recovery is not without risks and challenges, and Fairchild needs to be prepared. Let’s take a look at some of the themes.

1). Competitive market segment:  Fairchild has quite stiff competition in the power semiconductor (or high voltage semiconductors, as it is also called) and low- voltage semiconductor market. This always puts pressure on price control and also pressure to innovate. Innovation comes at a cost as it has R&D expenses attached to it.

2). Sales volatility:  Having large customers that account for 10% of sales volume can be a double-edged sword. Apple currently is the largest customer of Fairchild and the situation here is that if Apple loses market share, then Fairchild also feels the heat. Fairchild has to find a way to reduce dependence on one customer.

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