When International Rectifier Corp. opened its doors, the mission was the same as it is today: to help “rectify” energy.
In 1947, that meant shifting alternating electrical current into direct current for the post-World War II boom in television sets.
Today, it means perfecting semiconductor chips, many of which make virtually any powered device computers, hybrid cars, televisions, washing machines more energy efficient.
It seems to have the hang of it. The El Segundo-based firm has a market cap of $2.5 billion and net income of $107 million for 2006. It supplies chips to Whirlpool Corp., AB Electrolux, General Electric Co. and Sanyo Electric Co.
“Energy is the foundation of all cost on this planet,” said International Rectifier Chief Executive Alex Lidow. “If you spend money to save energy, you must look at how much you spent and subtract that from how much you saved to see if it’s truly energy saving.”
That’s about as simple as Lidow, who has a doctorate from Stanford University and is the son of company founder Eric Lidow, can make it, but his message is translating on Wall Street.
When the company last week announced it had developed a fully integrated hybrid motor control module that will enable sensor-free vector control of permanent magnet motors, analysts ate it up.
“We are assuming the coverage of International Rectifier with a buy rating and a 12-month price target of $42,” UBS analyst Uche Orji said in his investment report. “We believe that IRF will benefit from its strong position in the discrete integrated circuit market, which remain robust.”
Citing his cost vs. effectiveness rationale, Lidow said that he believes that the hybrid car, while seemingly cost effective for gasoline use, is actually energy wasteful in its current incarnation. But he is convinced that with Electronic Rectifier’s help, the hybrid car will be cost effective within the next few years.
“It’ll take a few more years of research and development,” Lidow said, “but we will be able to make the hybrid car essentially cost neutral.”
Lidow said this would be accomplished by developing motion control systems that demand less battery use and electronics that control the car’s motor.
Conservation focus
Sales of energy efficient chips account for roughly 30 percent of International Rectifier’s business, and the most profitable of the company’s units provides nearly 50 percent of its gross margins. The company’s basic business remains in computers and communications systems. It makes the chips that control battery power and keep lap top computers from overheating, for example, or control the power light flowing into a flat-screen television.
The company is trying to accent its energy-conserving efforts and shed its less-lucrative, non-energy saving units. About 34 percent of its business currently comes from computing, 14 percent from commodity chips and 12 percent from aerospace. That streamlining is another positive on Wall Street.
Analyst Orji commended the firm for its imminent divestiture of non-focus products, but it needs to pick up the pace, he said.
“We believe IRF’s multiple has reached a near-term trough and that is likely to expand in the next 12 months on stronger fundamentals and margin expansion in response to solid top-line growth and the margin benefit from the planned divestiture,” Orji wrote.
“Back in April 2006, IRF announced that it would complete the divestiture by the June 2006 quarter. For more than a year now, IRF, has been trying to sell the high-powered IC portion (3 percent of its sales) of its non-aligned products business, but so far it has not announced any sale.”
Breaking into the foreign market remains a challenge for International Rectifier, and the results of a recent partnership with Sanyo that provided access to the Japanese market remain to be seen.
International Rectifier managed $1.17 billion in sales in 2005, hardly a dent in the global market. Typically, it’s operating efficiently in terms of production, however. Since most of its clients are among the world’s more industrialized nations, the firm said the products used by its clients account for savings of 10 percent of the energy conserved globally in lighting, appliances and automobiles.
“That means that of the total piece of the pie that goes into energy, we actually return 30 percent of the world’s consumption,” said Graham Robertson, executive director for global communications for International Rectifier.
