Littlefuse (NASDAQ:LFUS): Color on warning

Littelfuse (NASDAQ:LFUS) lowered its second-quarter outlook last night, citing lower than expected electronic sales due to softness in the telecom segment and lingering effects of an inventory correction. The maker of circuit protection products said it now expects second quarter earnings of 40 cents a share. Earlier, it forecast earnings of 48 cents to 52 cents a share. The company now sees sales for the second quarter to be in line with first-quarter sales of $131.8 million, down from its prior view of up 2 percent to 5 percent sequentially. Analysts on average expected earnings of 50 cents a share, before exceptional items, on revenue of $137.3 million, for the quarter.

Littelfuse also lowered its full-year earnings view to $1.65 to $1.75 a share vs previous $2. The company said it is still confident of achieving 15 percent operating margin target by the end of 2009.

- Baird notes they remain Neutral on LFUS following the warning as management indicated thay experienced weakness in the telecom end market. Firm believes this was due to delays in sales to Huawei and Tyco for the 3G mobile phone deployment in China. They believe the summer Olympics in Beijing is no longer a catalyst for the rollout and consequently, the upgrade could take significantly longer than originally forecast.

Also, they believe the consumer electronics market remains somewhat weak. Littelfuse reported experiencing the continuing effects of an industry inventory correction; firm expects this is due to softness in the consumer electronics segment. While management had originally forecast the inventory correction to have been worked through by the end of the second quarter, the firm is concerned that slowing economic growth could prolong this correction.

Baird anticipates that under-utilization at production facilities, particularly at the Teccorplant, will put pressure on margins.

Firm's new $36 price target (down from $43) is based on 18x their 2008 EPS estimate. Historically, Littelfuse trades 20x.

Notablecalls: LFUS stock will be taken out to the woodshed today. I suspect the stock may be down today by as much as $5 to $6, meaning anything above the say $36 is probably shortable. However, the stock feels like a bouncer. The last time LFUS warned was in December 2004. Back then, LFUS gapped down but managed to put together a nice bounce. I would keep my eye on the $33 level for a long entry. Small size.

In 2006 the co set in motion a plan that management feels will lead to lessened earnings volatility (through a lowering of fixed costs), that has dogged the co for the past 10 or so years, and lead to its operating margin moving back to 15% of sales over the next few years (from 10-11% the past few years). According to management, this is achievable by 2009. The second leg of the plan is to ramp-up internal growth to the high- single-digit area (from mid-single-digits currently) by working more closely with its original design manufacturer customers and an increase in R&D.

Current problems feel more like a bump in the road.