International Rectifier in the Chips as Stock, Profits Rise.

THE semiconductor market is back, and so International Rectifier Corp.'s share price.

After the two worst years ever for semiconductor manufacturers, demand in 1999 is up and supply is tightening worldwide. That has helped boost International Rectifier's stock from under $10 a year ago to above $21 late last week amid a frenzy for chip stocks across the board in 1999.

In recent weeks, the enthusiasm seems to have cooled slightly, with analysts attributing some of the moderate decline to concerns that computer manufacturers may be building up chip inventories ahead of 2000. But demand for chips in everything from personal computers to cell phones is expected to remain strong after Year 2000 fears have subsided.

Several analysts have either upped or reaffirmed their recommendations for International Rectifier as a "buy" or a "strong buy." The company draws praise for committing to capital expenditures even in the lean years of 1997 and 1998, leaving it with more excess capacity than many of its competitors at a time when demand is high.

"They haven't fully utilized their capacity, so their fixed costs won't go up," said Terry Ragsdale, an analyst with J.P. Morgan Securities. "And they are in a business where production is pretty much priced according to supply and demand. Prices have returned to their historical levels, and may even exceed them in the next year or two. This is enabling them to cut costs, leaving them with a nice margin."

That would be welcome because the company's financials only recently have been looking up. For the first quarter ended Sept. 30, net income was $5.1 million (10 cents per diluted share), compared with $34,000 (0 cents) for the like period a year ago.

International Rectifier is the leading player in power transistors, which harness electricity from wall outlets or batteries into a more usable form. The chips are used to power personal computers and cellular phones, and are also found in other communications and office equipment as well as motor vehicles and appliances.

"They are the guys that actually power the devices," said Jonathon J. Joseph, an analyst with Salomon Smith Barney. "They have close to a 20 percent market share. They practically invented the power transistor industry."

International Rectifier's components are in virtually every system using Intel Corp.'s Pentium III microprocessor. In addition, the company is pushing to make proprietary multi-chip devices known, as modules an increasing part of its revenue stream.

Modules allow products to add functionality while saving energy. For example, a car that uses an electrical system operates off an alternator, which itself draws off fuel. Placed in automobile electrical systems, modules increase fuel: efficiency even as more features are introduced.

"A few years ago, (modules) were negligible. Now, they were 10 percent of our business in June and 12 percent in September," said Robert Grant, vice president for marketing, communication and e-commerce. "We expect them to be 15 percent of our business by June 2000 and 20 percent the year after that."

The company expects revenues to grow between 20 percent and 25 percent for the next couple of years, without any need to build new production facilities.

It is operating at only around 70 percent or so of capacity, compared with an industry-wide average of around 90 percent.

The stock fell from a 52-week high of $23.56 a couple of weeks ago amid some concerns that the chip industry had seen its share prices move up too far, too fast. Computer makers have expressed some concerns that the sales outlook is fuzzy, and the semiconductor industry as a whole is notoriously cyclical.

But admirers say International Rectifier is well positioned to take advantage of new applications.

"There's no question that the chip stocks have come a long way and are trading at valuations never before seen," said Ragsdale. "So looking at the next couple of months or two, I'm not advising people to jump in with both feet first. But in looking at the demand for semiconductors in the next couple of years, it will only be better next year, and maybe even better the year after that. It's really hard not to argue that IR's stock will go up."

                       International Rectifier Corp.
YEAR (June 30)                1999   1998
Revenue (millions)          $545.4 $551.9
Operating Costs (millions)   556.6  519.5
Operating Income (millions) (11.2)   32.4
Net Income (millions)         20.4   16.5
Earnings Per Share           $0.39  $0.32

SUMMARY

Business: Semiconductor manufacturing

Headquarters: El Segundo 

CEO: Alexander Lidow

Market Cap: $1.1 billion Dividend Yield: N/A [*]

Total Liabilities: $ 305.1 million P/E Ratio: 41.88

Long-Term Debt: $156.0 million

(*.) International Rectifier does not pay dividends.