Infineon’s product lines still face formidable competition

Business Strategy & Outlook

Infineon is a leading broad-based European chipmaker, with substantial exposure to secular growth drivers in the industrial and automotive chip sectors. Infineon should emerge as a leading supplier for electric vehicles and active safety systems used in cars, with increasing exposure to car “infotainment” systems. However, like most chipmakers, Infineon’s business remains highly cyclical as demand rises and falls with the health of its various end markets. Looking at the automotive chip market, electric vehicles and cars with advanced powertrain technology and safety systems require a variety of sensors and power voltage chips supplied by firms like Infineon. Similarly, the company’s exposure to power semis allows it to benefit from trends in the electronics industry toward power conservation, not only in more efficient devices like industrial drives, but also in green energy solutions like solar panels. Infineon is also a leader in chip card and security products, such as chips for chip-and-pin credit cards.

Finally, limiting exposure to challenging markets is just as important as increasing exposure to promising markets, and Infineon has done a good job of eliminating unattractive business segments in prior years. Nonetheless, Infineon’s product lines still face formidable competition. Many other large semiconductor firms also focus on power semiconductors and have similar products. Further, Infineon focuses on discrete power products rather than analog power management integrated circuits. While the former products are valuable to customers, the latter of which has more complex products that allow leading analog firms (such as several wide-moat names) to enjoy stronger pricing power and relatively higher returns on invested capital. Infineon also has hefty manufacturing capacity for its products, which may lead to a higher fixed-cost structure and may cause significant margin compression when supply far exceeds demand.

Financial Strengths

Credit Suisse has a common equity Tier 1 ratio of 14.4% currently, ahead of its own internal capital target of a 14% common equity Tier 1 ratio. This is comfortably ahead of its regulatory minimum capital requirement of 10%. However, Credit Suisse’s leveraged ratio of 4.2% is more of a constraint, with a regulatory minimum requirement of 3.5% and an internal target of 4.5%. Credit Suisse intends to pay out 25% of its earnings as a dividend and it has not announced new share buybacks. Credit Suisse will not be able to return more than this to Both Credit Suisse’s liquidity coverage ratio and its net stable funding ratio are comfortably above 100%, which indicates sound liquidity. To assess, these ratios, while helpful, do not fully capture the quality of a bank’s funding. One should also consider the structure of a bank’s funding—where the relatively lower importance of wholesale deposits in Credit Suisse’s funding mix is a clear positive. However, private banking/wealth management clients will typically be more sophisticated than the average retail banking client and therefore more likely to withdraw funds in times of stress. The private banking deposits aren’t as sticky as general retail deposits, although they remain stickier than wholesale funding.

Bulls Say

Infineon is now focused on its core industrial, automotive, and card security markets after a series of smart divestitures of underperforming businesses.
The automotive semiconductor market could see healthy growth in the years ahead, as gas-powered cars are being equipped with extra sensors and processors while hybrid and electric cars require additional chip content to control new types of engines.
Infineon’s power semis are well suited to benefit from broad-based demand across a wide variety of products seeking energy efficiency.

Company Description

Infineon Technologies headquartered in Munich, was spun off from German industrial conglomerate Siemens in 2000 and today is one of Europe’s largest chipmakers. The company is a leader in the automotive semiconductor market with prominent products used in active safety and powertrain content within vehicles. Infineon is also the market leader in power semiconductors used to deliver voltage within a wide variety of electrical systems. The company operates in four segments: automotive, industrial power control, power and sensor systems, and connected secure systems.

(Source: Morningstar)

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