Fairchild Semiconductor Intl Inc (FCS), Apple Inc. (AAPL): An Underperforming Stock That You Shouldn’t Sell

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Fairchild Semiconductor Intl Inc (NYSE:FCS)Around the end of April, I’d suggested that readers take a look at chipmaker Fairchild Semiconductor Intl Inc (NYSE:FCS), primarily a supplier of power management chips. The stock was trading pretty close to its 52-week low when it posted a loss while the Street was looking for a profit. However, it had issued bright guidance, and it looked like its end-markets were picking up steam and orders were flowing in.

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.

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