Stock pick: Avenir Capital
Ticker ETR: IFX (Germany)
Infineon (ETR: IFX) is a German manufacturer of analog and power semiconductors. Current concerns around automotive sales present an attractive entry point in a high-quality business that is benefitting from long-term tailwinds from the shift to electric vehicles, industrial automation and renewable energy.
Semiconductors are commonly perceived as hyper-competitive, cyclical and capital intensive, but the power and analog sub-segment has very different traits. Products typically have much longer life cycles than the consumer electronics that drives digital chip demand, price pressure is low and there are decades of design intellectual property that deter new entrants. Unlike digital semiconductors, which require high constant levels of investment to remain competitive (memory makers such as Samsung or Micron can spend 40% of sales on CapEx), analog semiconductors are half to one-third as capital intensive.
As a result, IFX generates high returns on invested capital (around 20%) and should be able to generate through-cycle sales growth of around 10%. About 40% of revenues comes from the automotive industry, where increasing electronic content in vehicles as well as the ongoing shift to electric drivetrains, and the promising future in autonomy, will benefit IFX. Power semiconductors also see wide use in industrial and renewable energy applications, and we believe IFX is one of the best positioned companies globally to benefit from these secular trends. IFX is cheaper (13x FY22 PE) than global peers such as Texas Instruments and ADI (both around 19x) yet has steadily taken share through time. In various product categories, share has consolidated around the winners, with IFX, in some cases, more than doubling its share to 40%.
The risks to the investment include larger than expected macroeconomic slowdowns that impact demand for cars, as well as industrial investment, competition and technological disruption.
This information has been prepared and provided by Avenir Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.