On Thursday, BofA Securities revised its price target for STMicroelectronics NV (STM:FP) (NYSE: STM), decreasing it to €29.00 from the previous €35.00 while retaining a Buy rating on the stock. The adjustment comes as the analyst noted a more profound impact from the current downcycle, particularly within the automotive sector, which is experiencing a significant correction.
STMicroelectronics is anticipating its first-quarter 2025 sales to fall considerably below the usual seasonal trends, with expectations of a low double-digit quarter-over-quarter decrease due to reduced volumes across various end-markets and a shorter quarter with 88 days compared to 94. This scenario is projected to lead to an additional 6% revenue decline.
The company's first-quarter sales are estimated to drop to $2.7 billion, a decrease of 18.6% from the previous quarter, with gross margins expected to fall to 35.5%. The decline in gross margins is attributed to lower utilization rates, unused capacity charges, reduced volumes, and pricing pressures.
In response to the challenging market conditions, STMicroelectronics' management has unveiled a restructuring plan aimed at reducing costs by a significant amount in the high triple-digit millions of US dollars by 2027. This strategic move is part of the company's efforts to mitigate the effects of the downcycle on its financial performance.
BofA Securities has also adjusted its earnings per share (EPS) estimates for the calendar years 2025 and 2026, reducing them by 33% and 11%, respectively. The firm forecasts a 7% year-over-year revenue decline for the company in the calendar year 2025, followed by a recovery with a 13% increase in 2026.
The new price objective of €29.00, equivalent to $32.00, is based on an 8.4 times the expected enterprise value to EBITDA ratio for the calendar year 2025, which is an increase from the previous 8 times but still falls within the historical range of 5 to 10 times, excluding the COVID period.
In other recent news, STMicroelectronics has reported third-quarter earnings that surpassed analyst estimates, despite facing significant revenue shortfalls and ongoing challenges in the industrial market. The company's adjusted earnings per share for the third quarter were $0.37, exceeding the analyst consensus of $0.33. However, the revenue of $3.25 billion missed the expected $3.29 billion, marking a substantial 23.5% YoY decline across all reportable segments.
STMicroelectronics has also provided a cautious outlook for the fourth quarter, projecting revenue at $3.32 billion. This forecast signifies a 22.4% YoY decrease and a mere 2.2% sequential increase, falling short of the $3.4 billion analyst consensus. Additionally, the company expects the Q4 gross margin to be around 38%, influenced by approximately 400 basis points of unused capacity charges.
In light of these developments, STMicroelectronics has launched a new company-wide initiative to reshape its manufacturing footprint. This program aims to accelerate wafer fab capacity to 300mm Silicon and 200mm Silicon Carbide while resizing its global cost base. The company anticipates that this initiative will result in annual cost savings in the high triple-digit million-dollar range by the end of 2027.
InvestingPro Insights
Recent InvestingPro data provides additional context to STMicroelectronics' current situation. The company's P/E ratio stands at 8.67, suggesting it may be undervalued relative to its earnings. This aligns with BofA Securities' maintained Buy rating, despite the lowered price target.
STMicroelectronics' revenue for the last twelve months as of Q2 2024 was $15.41 billion, with a revenue growth rate of -11.02%. This decline is consistent with the analyst's observations about the impact of the downcycle, particularly in the automotive sector.
InvestingPro Tips highlight that STMicroelectronics holds more cash than debt on its balance sheet and has maintained dividend payments for 26 consecutive years. These factors could provide some stability during the challenging period ahead. The company's ability to sustain dividends might be particularly appealing to investors seeking income during market volatility.
It's worth noting that InvestingPro offers 12 additional tips for STMicroelectronics, providing a more comprehensive analysis for investors interested in navigating the current market conditions.
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