Short-Term Concerns for STMicro

STMicroelectronics N.V. (STM - Analyst Report) continues to upgrade products and forge strategic alliances in order to fuel long-term growth. The company reported an in-line 2008 first quarter in terms of revenues, driven by strong performances from its ASP (Application Specific Product Group) and IMS (Industrial and Multi-Segment Group) groups. However, we still expect that the strengthening Euro will ultimately lead to margin weakness, even as the company continues to cut costs. Thus, we rate STM a Hold.

The restructuring of its manufacturing facilities - through the opening of its Chinese facility as well as the initiation of a partnership with International Business Machines Corp. (IBM - Analyst Report) - may enable the company to save on R&D [research and development] spending, which could help alleviate some cost pressures. Additionally, the sale of its Flash Memory Unit, which is now completed, might also help improve margins.

Shares of STMicroelectronics are trading at a level where they are fairly valued in relation to its peers, in our opinion. We feel STM should trade between 13.8x to 14.0x our adjusted 2008 estimates until we have more visibility into 2008 after the finalization of the divestiture of the flash memory segment and the restructuring of its manufacturing facilities which are expected to be dilutive to earnings in the near term. Therefore, we have fixed our target price at $12.10 over the next six months, as we remain concerned about the short-term outlook of the semiconductor market.

Udayan Mukherjee contributed to this report.

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