On Thursday, BofA Securities adjusted its stance on STMicroelectronics NV (STM:FP) (NYSE: STM) shares, reducing the price target from €43.00 to €35.00, while still recommending the stock as a Buy. The revision reflects a response to several headwinds affecting the semiconductor industry, including a broader economic slowdown in Europe and China, weaker demand in the automotive sector, and unimpressive smartphone sales.
The firm has revised down its revenue forecasts for STMicroelectronics for fiscal years 2024 to 2026. The new projection for FY25 is $13.8 billion, which is a slight year-over-year increase of 2.9% but a decrease from the previous estimate of $14.5 billion, and below the consensus of $14.7 billion. For FY26, the revenue is now anticipated to be $15.6 billion, down from the earlier forecast of $16.4 billion and the consensus of $16.6 billion.
These lowered revenue expectations have led to a corresponding reduction in gross margin (GM) estimates for the same period. The GM estimates have been adjusted from 40.0%/41.1%/44.0% to 39.7%/40.5%/44.0%. This reflects the impact of higher unused capacity charges, more negative pricing, and lower absorption of fixed costs.
Consequently, earnings per share (EPS) estimates for FY24-26 have been reduced by 5.5%, 15.7%, and 10.7%, respectively. The new EPS estimates are now 5-7% below the consensus. The price objective (PO) cut to €35.00, which is equivalent to $38.00, is based on an 8x FY25E EV/EBITDA multiple, down from 9x previously, factoring in persistent concerns over mergers and acquisitions.
Despite these adjustments, BofA Securities maintains a Buy rating on STMicroelectronics, citing the stock's attractive valuation. The valuation is deemed appealing, with a new ratio of 6.4x FY25E EV/EBITDA compared to a historical range of 5.5x to 10.7x excluding the COVID period. The firm also notes the potential positive impact of the recent stimulus package in China on the company's prospects.
InvestingPro Insights
Recent data from InvestingPro provides additional context to BofA Securities' analysis of STMicroelectronics. The company's P/E ratio of 9.29 and P/B ratio of 1.54 suggest that the stock may indeed be undervalued, aligning with BofA's view on its attractive valuation. This is further supported by an InvestingPro Tip indicating that STM's price has fallen significantly over the last three months, with a 29.67% decline in the 3-month price total return.
The company's financial health appears robust, with an InvestingPro Tip highlighting that STM holds more cash than debt on its balance sheet. This strong financial position could provide a buffer against the industry headwinds mentioned in the article.
However, in line with BofA's revised forecasts, an InvestingPro Tip notes that analysts anticipate a sales decline in the current year. This is reflected in the revenue growth data, showing an 11.02% decline in the last twelve months.
For investors seeking more comprehensive analysis, InvestingPro offers 11 additional tips for STMicroelectronics, providing a deeper understanding of the company's financial position and market performance.
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