SWKS is growing revenues and earnings nicely, the market for their products is growing fast, and they are currently trading at a TTM P/E of 25.2. They also pay a small dividend of 0.54%.
QRVO and AVGO are competitors. Ray posted some information about QRVO earlier today. I haven’t previously looked at QRVO and AVGO. I thought it would be useful to run a rough comparison of the three companies. Here are the numbers I got from the QRVO presentation that Ray referenced and the AVGO earnings releases:
SWKS QRVO AVGO
Market Cap ($B) $18.5 $11.7 $32.2
TTM Rev ($B) $2.59 $2.34 $5.26
TTM Adj EPS $3.83 $2.91 $6.19
Stock Price $96.51 $77.79 $125.02
Last Earnings 12/14 12/14 02/01/15
TTM P/E 25.20 26.73 20.20
EPS Gwth (QoQ) 88.1% 181.0% 148.8%
Rev Gwth (QoQ) 59.6% 29.5% 133.7%
EPS Gwth (YoY) 64.4% N/A 101.0%
Rev Gwth (YoY) 40.6% N/A 98.1%
Dividend 0.54% 0% 1.22%
Cash ($B) $1.05 $0.297 2.57
C Ass/C Liab 4.78 3.44 4.85
LT Debt ($B) $0.15 $0.05 $4.53
Ttl LT Liab ($B) $6.22
Just from these numbers, it appears that AVGO is growing the fastest. It also has the lowest P/E (about 20). SWKS and QRVO has very similar P/Es to each other (about 25 and 27). One big difference is that AVGO has a lot of long term debt ($6.2B) while SWKS and QRVO have negligible debt compared to their cash positions. Also, SWKS and AVGO pay dividends while QRVO does not.
Based on the analysis of these numbers, I would dig into AVGO a bit more as it seems to be a bargain. I would also examine these companies more closely to try to determine what their future growth might look like and how strong their competitive advantages in their markets are.
Chris
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AVGO has several divisions, their cash-cow creats RF components that goes into the iPhone and Samsung phones.
Their second consistent revenue generator is the division that creates Storage controllers for Enterprise, i.e. the glue (chips and software) that connects storage drives to servers. Used with EMC or Netapps storage.
Big customers would be Datacenter houses that need the massive storage and reliability. Revenue from this division is stable, with steady growth.
Long renewal cycles because of enterprise customers.
Another division is the Disk-drive division, targeted to consumer storage.
Seagate, toshiba, fujitsu being some of the customers. Decent revenue, future a couple of years out unkonwn, since it is very technology centric.
They also have an industrial electronics division that is boring, solid and steady, not sure if there is a lot of growth here.
They just acquired Emulex to get into the storage switching business, again targeted to Datacenter customers.
Kris
2 Likes
Hi Chris,
I took a very quick look at AVGO this morning. Here are just a few things that might be influencing the multiple, fwiw…
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They are vulnerable to interest rates. A 1% rise in rates would roughly translate into a negative .17/share pretax.
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Their growth has been through acquisitions rather than organic. EPS was pretty much flat, revenue an annualized 6% from 2010-2013 – until they made the buys. It looks like they are going to get cash flow with Emulex but nothing in the way of growth. Haven’t looked at the other one.
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The upcoming integrations are a significant risk.
That’s my 20 mins + .02 – be interesting to see what you find if you take a deep dive.
Ears
3 Likes
Hi Chris, Your presentation on Avago interested me and I took a look. I was getting ready to post and much of what I discovered was already mentioned by Ears in the post just before, but here it is.
This was a company going nowhere:
Annual Revenue (in billions):
2010 2.09
2011 2.34
2012 2.36
2013 2.52
And then all of a sudden:
2014 4.31
Made me suspicious that what we were seeing was acquisition, not growth. Sure enough:
Avago completed the acquisitions of LSI Corporation (“LSI”) on May 6, 2014 and of PLX Technology Inc. (“PLX”) on August 12, 2014. Avago’s results include the operating results from LSI starting the third fiscal quarter of 2014 and from PLX starting in the fourth fiscal quarter of 2014.
The same with non-GAAP Earnings (in dollars)
2010 2.19
2011 2.70
2012 2.77
2013 2.89
And then all of a sudden:
2014 4.90
I don’t see any reason for now to think this is going to be a growth stock. Comparisons will be great the first couple of quarters and then may just be flat. They should end up with about $8.50 in earnings this year (at $125 that’s a PE of 15), and maybe $8.90 next year, etc. It’s not going to be a SWKS (growing revenue at 60% and earnings at 100% — organically!)
Saul
7 Likes
Thanks Saul and Ears for looking back further at AVGO and pointing out the reason for their high growth. You have saved me the trouble of digging deeper.
On a separate note, I was thinking about what would happen if SWKS levered up to a similar ratio to what AVGO has done. If they issued $2.5B in notes at 4% interest and used the proceeds to repurchase 25 million shares at $100, their share count would drop from 180m to 155m. This would move their TTM Adj EPS from $3.83 to $4.45, an increase of 62 cents. But this doesn’t yet consider the reduction in earnings from additional debt service. Debt service is $0.64 per shares times (1 minus their corporate tax rate). If their tax rate is 35% then their new Adj EPS would move from $3.83 to $4.02. That’s only a 5% increase and after underwriting fees it’s not worth it. An interesting exercise and a way to compare similar businesses where one is leveraged and one is not.
Chris
1 Like
Full disclosure I own AVGO, considering SWKS.
Had bought Trident a few years back that merged with RFMD and became QRVO. Now have a very small position in QRVO.
I don’t have ADI, NXPI or other stocks in this space.
I don’t have enough expertise on the financials, but from a technology
standpoint SWKS is mainly focused on the RF components, i.e.
“analog and mixed signal semiconductors”
I think somewhat similar to ADI, Analog Devices.
I’m not sure how big of an exposure ADI had to Apple but here’s
something I googled:
http://news.investors.com/033015-745661-analog-devices-said-…
As regards AVGO, the LSI acquisition was mainly to diversify their business into the Storage space. This is confirmed by the Emulex acquisition. I think their recent price hike is mainly due to the wireless division and success of the iPhone, as was NXPI, National Semiconductor. I think AVGO is laying the groundwork to diversify
their revenue stream from the purely RF IC’s for mobile space to
IC’s and systems for the storage space as well. It would be interesting
to see if the earnings are broken down by division.
Kris
Forgot to add, the LSI integration went through very rapidly.
Two key storage divisions were absorbed.
Two divisions, deemed not in sync with AVGO’s business model were sold off
to Intel and Seagate within six months of the merger.
PLX was acquired by one of the ex-LSI storage divisions within AVGO.
Emulex is a new acquisition and this has to play out.
It will be interesting to see how Emulex will add to AVGO’s bottom line.
Kris
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