Earnings Preview: Fairchild Semiconductor

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Elizabeth Pate of FBR Research wrote a note to clients on Fairchild Semiconductor (FCS) in her latest overview of the semiconductor components sector. Excerpts follow:

Fairchild Semiconductor: Outperform, $23 Price Target

4Q earnings preview:
We believe FCS' 4Q is currently tracking to expectations of 1%-3% QOQ revenue growth and for gross margins to improve by 50-150 bps. We currently forecast 4Q07 revenues and EPS of $434 million (up 2% QOQ) and $0.30, respectively... We do not think the firm has seen any signs of a U.S. or global macro slowdown yet, and global distributor inventory levels remain low to guard against such a possibility.

1Q guidance expectations:
We believe that 1Q revenues could be guided to decline by 2% to 5% sequentially, given seasonally lower PC, handset, display, and consumer-related chip shipments. Gross margins should also tick down due to lower fab utilizations. We currently forecast 1Q08 revenues and EPS of $421 million (down 3% QOQ) and $0.25, respectively, slightly below consensus estimates of $428 million and $0.26.

Fairchild investment thesis:
We like shares of FCS at current levels and rate the stock an Outperform with a $23 target, given that 1) expanding operating margins are likely in coming years, 2) the new management team is pursuing significant strategic retooling efforts, and 3) the stock is too cheap to ignore, trading at 1.1x trailing sales and 11.5x 2008 P/E.

Fairchild valuation methodology:
Our $23 stock price target is based on a 17x our forward EPS estimate (2H08 and 1H09). Historically, FCS has traded within a range of 10x to 30x its forward EPS estimate.