Here’s Why Littelfuse Stock Could Drop to $200

Littelfuse stock (NASDAQ: LFUS) is up around 45% since the beginning of 2020, and at the current price of $279 per share, we believe that Littelfuse stock has significant potential downside.

Why is that? Our belief stems from the fact that LFUS stock is up more than 2.5x from its low in March 2020, while the S&P has moved a little over 70% in comparison. Further, with demand struggling to rise to pre-Covid levels, we believe LFUS stock could head lower. Our dashboard What Factors Drove 63% Change In Littelfuse Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Littelfuse. a multinational electronic manufacturing company, primarily producing circuit protection products, saw its stock price rise since 2018 despite a 13% drop in revenue. This combined with a 3% drop in the net margins meant that net income fell around 15%. Further, a roughly unchanged outstanding share count, led to earnings-per-share dropping around 15%, too.

Also, LFUS saw its P/E (price-to-earnings) ratio jump from 26x in 2018 to 34x in 2019, and has since jumped to almost 50x, riding the rally in technology stocks. Given that industrial demand is still not back up to pre-Covid levels, we believe there is a possible downside risk for the P/E multiple.

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So what’s the likely trigger and timing to this downside?

The global spread of coronavirus has led to a drop in demand for electronic and hardware devices across all markets, which means lower semiconductor demand, and lower demand for Littelfuse’s circuit protection products. Littelfuse’s revenues in Q3 2020 saw a YoY growth, but on a nine months ended basis, revenues stood at $1.04 billion, vs $1.17 billion for the same period last year. A rise in operating expenses and a slightly higher effective tax rate led to a drastic drop in net income, pushing EPS down to $2.92 for the first 9 months of 2020, from $4.72 for the same period last year.

Going forward, we expect revenue growth to stay weak in the near to medium term, and if the company is not able to control expenses, we believe the stock will see its P/E multiple decline from the current level of 50x to around 42x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $220, a downside of around 20% from the current price near $280.

While Littelfuse stock may seem overvalued, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Intel vs Cisco.

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