Technology "Power" Play
11/12/2004 12:00 am EST
Fred Hager is known for his in-depth coverage of technology leaders. Despite interim ups and downs, his long-term technology portfolios have averaged a remarkable 40%+ annualized return since 1986. Here, he looks at a play on energy conservation and power management.
"International Rectifier (IRF NYSE) is involved in power management for semiconductors, allowing for great power efficiency and extended battery life. Its products are used in a range of end markets, including information technology, automotive, consumer electronics, aerospace/defense, and industrial. The stock recently traded higher based on the company’s strong earnings report. The company reported $0.59 per share earnings compared to $0.30 per share in the same quarter last year. Even accounting for the revenue benefit of a business unit that IRF plans to divest, the company beat analyst expectations. IRF posted record revenues, backlog, and gross margins: an impressive triple play.
"Revenues from the firm’s high performance analog integrated circuits and advanced circuits devices grew 18% from the prior quarter and 64% from the prior year quarter. This reflects strong demand for the company's technology solutions. The company is very excited about growing opportunities in power management products aimed at energy conservation as the demand for such products is likely to increase substantially given the added pressures brought on by higher energy costs.
"In its conference call, the company noted the rapidly accelerating adoption of energy efficient household appliances, lighting, and automobiles where IRF technology is being quickly adopted. The company views its strategy in these areas as parallel to its successful strategy in power savings in computers. IRF revenues grew 91% in energy saving appliances. Although IRF revenue is skewed toward information technology (IT), the additional breadth of their power management solutions provides a good mix of proprietary products in a range of markets. For example power management in hybrid vehicles is also a growing market.
"We believe IRF is in a unique position as a technology company. As we have seen, technology markets associated with IT/computers can and do fluctuate inversely with the energy markets. Although the true correlation of energy consumption in these markets is not that strong in terms of manufacturing, the assumption that there will be a lower amount of consumer income available for purchasing IT products is a real phenomena. Being uniquely qualified to benefit from the ‘power savings through technology’ market, IRF is positioned on both sides of the energy squeeze equation.
"We like the long-term prospects of IRF as they continue to leverage proprietary power solutions in a diverse set of markets. With an increased emphasis on power consumption likely to accelerate due to high energy prices, the outlook for IRF providing solutions in this area is bright. We also expect this market to be further boosted by government focus on energy in the coming years. We remain bullish on the company and believe the strength in their numbers is revealing in light of the relative softness in the overall IT market. Continued successful execution is likely to bring a higher multiple to the company as well. We believe the stock could eclipse $70 in the next 12 months."