Littelfuse Earnings: Impressive Profitability To Open a Tough 2023, Shares Ripe for Long-Term Buyers

We maintain our $318 fair value estimate for narrow-moat Littelfuse LFUS shares after its first-quarter results and second-quarter guidance exceeded our expectations. Littelfuse’s first half of 2023 looks better than we previously feared, despite pockets of weakness enduring in its consumer-facing, communications, and automotive markets. We now expect more modest softness in 2023, but uncertainty remains in the second half of the year with how customer inventory destocking and demand progress. Even in a mild environment, we remain impressed with Littelfuse’s execution on profitability. Past 2023, we continue to view Littelfuse as a long-term beneficiary of trends toward electrification across its end markets. Shares rose 7% after the print, but we continue to see material upside for investors that buy in at current levels.

First-quarter sales dipped 2% year over year and 1% sequentially, more modestly than we expected and well above guidance. The electronics and transportation segments both declined, but industrial showed another quarter of robust growth. Weaker demand from consumer and communications markets is weighing on electronics sales, and inventory destocking at customers is impacting both electronics and transportation. We’re impressed with results nonetheless, and electronics in particular fared far better than we predicted.

Profitability rose strongly from the prior quarter, with gross margin rising 290 basis points sequentially to 40.2%. Demand for Littelfuse’s power chips and industrial products buoyed margins, as did pricing actions in response to inflation. Non-GAAP operating margin of 19% is a healthy level for the firm and rose 160 basis points sequentially.

Second-quarter top- and bottom-line guidance beat our forecast, with a sales midpoint of $620 million implying 2% sequential growth. Management expects improvement for transportation and industrial sales and moderation for electronics. Bottom-line guidance implies steady, strong profitability.