German semiconductor designer and manufacturer Infineon Technologies (IFX) - spun off from Siemens in 1999 - is benefiting from both improving economic conditions and long-term structural trends towards increased use of electronics in the industries it serves. Broker Liberum predicts that rising orders coupled with considerable scope for margin improvement will power a compound average EPS growth rate of 29 per cent between 2013 and 2018. Yet Infineon's shares trade at a considerable discount to those of competitors. We think a re-rating is in order.
- â– 29% EPS CAGR forecast from 2013 to 2018
- â– Well diversified
- â– Large cash pile
- â– Cheap versus peer group
- â– Exposed to cyclical economies and markets
Over recent years, Infineon has had its fair share of problems, including depressed trading in Europe and in its industrial segment, which resulted in falling revenues in 2013. But there are now clear signs that things are changing. In its second quarter to the end of March, sales were up 14 per cent on the previous year at €1.05bn (£0.85bn) while profits after tax surged to €124m from €33m a year earlier, helped by a €25m revaluation of its work-in-progress inventories. Even excluding the impact of one-offs, profitability surged, with underlying operating margins coming in at 13 per cent compared with 7.4 per cent a year earlier. Meanwhile, the book-to-bill ratio is running at 1.3 times, suggesting there is plenty of potential in the pipeline.