Skyworks (SWKS) mid-quarter review
Let me preface by emphasizing that I am not a techie, and therefore what I am giving on my own inexact impressions, which may definitely include misunderstandings. Okay,
Who is Skyworks?
This company was founded in 1962 and is headquartered in Massachusetts. They design and manufacture their own complex analog semiconductors that power wireless connectivity in everything from smartphones to medical devices. They are sometimes lumped as an “Apple supplier” but they sell their chips to just about every smart phone manufacturer there is, and their products are in almost every model produced by every manufacturer. They are also expanding into the Internet of Things and are in automobiles, smart homes, etc.
What is your history with them?
I’ve been a stockholder for roughly 16 months now. They are my largest position, and have been one of my top three for a long time. My SWKS position size is larger than it’s prudent to have for a position in any one stock. Yes, I’m aware of that.
Don’t chip manufacturers become commoditized?
Yes, that usually happens because competitors make cheaper competing products, causing the company’s margins to fall and fall. Skyworks has taken a different route, however and have become a “Master of Complexity”. They plan with the manufacturer from six months to two years ahead of time what the manufacturer wants and needs in a future model, and then Skyworks combines multiple functions in the same chip. They make themselves indispensible to the manufacturer. Their gross margins have been rising consistently, not falling. They had set a medium range goal of 50% gross margins but have already surpassed that so they have raised their goals to 55%. Their operating margins were about 35% last time I looked. Does that sound as if they are being commoditized?
How does this benefit their customers?
In the past, as I understand it, the customer (phone manufacturer XYZ) had to buy, let’s say five commodity chips, for five functions, from different manufacturers, and then XYZ’s engineers had to figure out how to make them work together in the best way to do what XYZ needed. Now, XYZ works in advance with SWKS (who already knows a lot about what XYZ wants from working with XYZ on earlier models), plans ahead for the next model, and then the complex chip arrives. It combines all five functions in advance so they work together, it’s smaller (important), uses less power (very important), and it’s cheaper than buying five separate chips (I think). All in all, this is a very important relationship for XYZ.
Can’t they just be designed out of the next model in a few weeks if someone else comes along with a cheaper chip?
You’ve got to be kidding! Did you read the paragraph above?
But how can they keep 50% gross margins and rising? Why don’t the phone manufacturers pressure them to cut margins?
Because the phone manufacturer is getting a tremendous bargain and benefit. They don’t have to have engineers trying to jerry-rig the integration of five different functions at the last minute. They get them all on one chip, and it’s smaller, less energy consuming and cheaper. If someone came along and said “We’ll sell you a chip that can do function three for 15 cents cheaper,” they’d laugh at them. Company XYZ simply doesn’t care how much money SWKS is making because SWKS is saving XYZ a lot of time, energy, money and headaches. (That’s how I see it anyway).
If they are already in all the phone manufacturers, where do they go from here?
First of all, they get more content in each new phone model. For example if their chip is already performing five functions, they may say to XYZ, we can tie in function six in our next chip and you won’t have to buy that commodity chip six separately and integrate it yourself. How can the manufacturer of chip six compete against that offer? Say they’ll cut 10 cents off the price of the chip? Who cares?
Second, their most rapidly growing area is the Internet of Things, which is just starting out.
Thirdly they may be expanding into new areas with acquisitions (see below).
How has SWKS stock been doing?
Let’s see. I initially bought 16 months ago at $52. Five months ago they were at $112. Since then they’ve fallen as low as $74 and they are now at $78 with a PE of 14.9 (adjusted).
Wow, they are 30% off the high. And with a PE of under 15 they must be doing terribly!
Yes, they are only growing their trailing 12-month earnings by 63%. It’s terrible! Let’s see, why did the price drop so much in the last five months? Well for the June and Sept quarters, their revenue was only up 38% and 23% year-over-year, and 6.2% and 8.8% sequentially. And for the same June and Sept quarters, their adjusted earnings were only up 61% and 36% year-over-year, and 16.5% and 13.4% sequentially (!!!) Their (GAAP) gross margin percentages for the past eights quarters have been:
43.9
44.2
45.0
45.1
46.3
46.2
48.5
50.0
And they are estimating 51.0 next quarter.
They had had a goal of making $7 a share by 2017, and they just raised it to $8. During 2015 they’ve doubled their quarterly dividend from 13 cents to 26 cents.
No wonder they fell to a PE of 14.9.
How else do they reward shareholders?
They have a policy of paying out at least 40% of free cash flow to stockholders in the form of dividends and stock buybacks.
I’ve heard they are trying to acquire another company?
Yes they are trying to acquire PMC-Sierra, which would give SWKS entree into a different field, data storage in the cloud (as I understand it, please correct me if i’m wrong). PMC had been flat for ten years, and languishing at a price of $6, but when SWKS made a deal to acquire them, another company, which is smaller, and has a huge debt load already, started bidding for PMC as well, causing a lot of uncertainty. I figure SWKS will do well with or without PMC.
To summarize, here’s a single sentence and a half from a great post by DataBaseBob:
To sum up what gets me so excited about Skyworks: Skyworks has deep relationships with a variety of customers, they have expertise in technologies that support existing and emerging products with huge growth potential, and their competitive advantage is expanding, not contracting.
Hope you found this interesting, entertaining, and useful.
Saul
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