CORPORATE FOCUS — New Chips Power a Major Surge in Stock of Tech Firm

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After a brief spell of relative quiet, International Rectifier Corp. is again setting the stock market on fire.

When the El Segundo-based company announced on June 22 that it would produce a new generation of power chips, its share price jumped from $49.50 to $55. It was trading as high as $59 last week, before closing at $55.13 on July 5.

The new chips, called power integrated circuits, fine-tune the power consumption of household appliances, such as washers and dryers, and will be used by major manufacturers Maytag, Frigidaire and Electrolux, among others that want to develop more energy-efficient products.

The next-generation chips are also the most recent step in the company’s ongoing transformation, from being primarily a maker of power semiconductors for the components market, to being a designer and developer of more-differentiated power management solutions. Whereas competition is stiff and margins slim for manufacturers of the most basic and commonly used power chips, there is a growing need for highly specialized power systems designed for a specific product and client.

“These are proprietary, multi-year agreements with large clients in the automotive and household appliances industries, among others,” said Robert Grant, International Rectifier’s vice president for marketing. “For example, we have an agreement to provide the entire (electronic) module that replaces hydraulic power steering systems.”

It’s International Rectifier’s move into the new power systems market segment that has investors particularly excited, because it puts the company at the vanguard of a highly profitable, less cycle-dependent segment of the semiconductor industry.

“Historically, the company has done well in an up cycle and badly in a downturn,” said Todd Cooper, an analyst with Stephens Inc. “By diversifying into more value-added products, they are going to be less exposed if and when the current cycle comes to an end.”

The semiconductor industry has been notoriously cyclical and is currently going through a period of strong growth, said Cooper, the end of which is not yet in sight.

Driving the growth is, among other things, the ever-increasing demand for lighter, faster and more powerful electronic devices, such as cell phones and computers, that require power-management solutions to optimize their performance. High industry demand, together with International Rectifier’s inroads into next-generation power management chips, has given the company’s bottom line a very substantial boost.

For the fiscal third quarter ended March 31, the company reported net earnings of $21.7 million (38 cents per share), compared to $4 million (8 cents per share) for the like quarter one year ago. (That beat analysts’ consensus estimate by 10 cents per share.)

Revenue was $197.9 million vs. $137.6 million.

The company has not yet released earnings for the fourth quarter or fiscal year 2000, which ended June 30. However, analysts are projecting big increases again. The consensus estimate for fiscal 2000 earnings calls for $1.17 per share, vs. 12 cents per share in 1999. And analysts’ estimates for 2001 are as high as $2.23 per share.

“They’ve become very broad-based and are targeting all the sweet spots in the market,” said Vincent Benedetti, an analyst with Gruntal & Co. “They’re in handheld devices, automotive products and industrial products, and with their new proprietary products, we expect to see gross margins increase quarter over quarter.”

With International Rectifier’s proprietary power-management chips in many popular, portable electronic products from Motorola cellular phones, to Sony’s Play Station II, to notebook computers running Intel’s Pentium III microprocessor Benedetti believes the upcoming back-to-school season and Christmas holiday season will produce another huge wave of demand for the company’s chips. Accordingly, he has set a target price of $75 for International Rectifier’s shares over the next six months, and rates them a “strong buy.”

Other analysts that follow the company also rate it either a “buy” or “strong buy,” even though the share price has been climbing steadily over the past 12 months.

One year ago, the shares traded as low as $12.94, but a succession of positive earnings surprises and new products has made it one of the best-performing stocks in the semiconductor industry.

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