International Rectifier: Margins Weak; Citi Downgrades

International Rectifier (IRF) shares are getting clobbered this morning on concerns about the chip maker’s weakening margins - and a downgrade of the shares by Citigroup’s Terence Whalen.

For the fiscal third quarter ended March 29, the company reported total revenue of $146.6 million, ahead of the Street consensus at $139.3 million. Revenue from continuing operations was $132.6 million, down 24% sequentially and 41.7% year over year. The company reported a loss of $81.7 million or $1.13 a share; back out $42.7 million in various charges, and a little back of the envelope math finds a non-GAAP loss of $39 million, or about 54 cents a share, worse than the Street forecast of a loss of 39 cents.

Gross margin in the quarter was 21.1%, or 21.5% for continuing operations; that is down from 36.3% in the December quarter, and 24.5% a year ago, and much worse than expected. Goldman Sachs analyst James Schneider notes this morning that he had expected a 36% gross margin the quarter, but that the company was clearly hurt by lower factory utilization rates and an unfavorable mix shift.

For the fourth quarter, the company is forecasting revenue from continuing operations of $130 million to $150 million, but with a further decline in gross margin.

CEO Oleg Khaykin said in a statement that “current visibility is still cloudy.” He says orders have improved, particularly in Asia, but says “we do not want to confuse inventory replenishment with a fundamental change in end-market demand.”

Citigroup’s Whalen cut his rating on the stock to Hold from Buy, trimming his price target to $17, from $19, asserting that the weak near-term gross margin story overshadows the strength in revenue and an improved inventory picture.

UBS analyst Uche Orji this morning repeated his Neutral rating and $14.50 target on the stock, asserting that, while the company has made progress on the inventory front, he says further moves to bring down its own inventory and to reduce supply in the channel will pressure the bottom line going forward. He also says the company remains hampered by high exposure to the weak industrial and auto end markets.

IRF today has tumbled $2.68, or 16.5%, to $13.59.