SWKS malaise and two scenarios

Investment Analysis Clubs Saul’s Investing Discussions
1

Monkey’s cogitating about Skyworks:

In lieu of any actual news from the head Suits, there’s been a lot of malaise around the stock:

  • worry about a low-ball buy-out rumor
  • Intel taking away business
  • Apple slow-down
  • Brexit slow-down
  • other competitors catching up or taking away business
  • a drifting price in the downwards direction

And yet, everything management is saying and the financials are showing suggest the opposite:

  • increasing margins = less competition not more
  • “a strong second half” = clear visibility about their customers’ pipelines
  • increasing market share and increasing markets and growth opportunities
  • the oft quoted line 'we do really complex things that other companies can’t and competitors won’t switch away from us to save a few pennies."

So:

  1. Skyworks is currently either a ridiculous value or

2)There are things we don’t know and things we don’t know we don’t know and we might be caught holding the bags while some other tech fox steals he revenue pie.

SWKS is currently monkey’s largest position because of his wager that the higher probability is the case being the former. And when there’s a fat pitch, you swing hard–that’s how you beat the market.

But can we have some human big brains chime in on this and perhaps argue for the latter? What are we failing to see here? How can management publicly argue for how strong a position Skyworks is in if its not true?

Plus, if the buyout rumors are true, it would be silly to sell or reduce at 62 when 87 can be had a bit down the road. Bananas don’t grow on trees you know…

Humbly Yours,

Monkey
(Long SWKS and INFN, for that matter, which is maybe teaching him something: don’t invest in something your pea-brain can’t comprehend with 100% of its mind)

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2

I’ll offer my 2 cents. I don’t have any skin in this game.

I try to separate the world as I would like it to be from the world as it is.

In the world as it is, the consensus FY 2016 EPS forecast of analysts (who get paid a lot to study Skyworks and its competitors) has fallen over the past 90 days to $5.49 from $5.73. So, for whatever reasons, the near-term outlook has become somewhat less rosy, as they see it.

Also, their consensus EPS estimate for Skyworks for FY 2017 has been revised downward over the past 90 days to $6.16 from $6.65. EPS forecasts for next year involve a lot of guesswork, of course. But the point is that the best guess of these analysts is that EPS will increase by around 12% going forward. And they are fairly uncertain about that. Ergo, a multiple in the low/mid teens is not particularly bizarre, esp. for a chip stock. (Chip sales tend to be cyclical. So P/E’s can be problematic from year to year. It’s complicated.)

If you are quite sure that you are right and the analysts (and the market) are wrong, then go for it. Otherwise, a bit of humility may be in order.

Contrast SWKS with AVGO, a competitor that pulled off a significant merger recently, which has improved its competitive profile. Consensus EPS forecasts for AVGO increased over the past 90 days to $10.95, from $10.52. And the consensus EPS forecast for FY 2017 also increased, to $12.97 from $12.59. This implies EPS growth of 18.5% y/y. But even AVGO’s P/E is only around 14.

And there are other solid competitors out there, e.g., QRVO. Not to mention QCOM and even perhaps INTC trying to muscle in.

I am old–too old to put all my chips on any one stock in this niche. I would divide my chips among two or three of the top names. But that’s just me. Actually, I own none of them at the moment.

24 Likes
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Happy anniversary MisterFungi!

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Hi Monkey.

I’m not going to present the bear case very compellingly because I’m solidly in the bull camp. Even more so at recent prices (I peg air value in the $85-90 range, but I don’t really use Wall Street-type models).

Additional bear arguments include:

  • broad market (read: IoT) revenue expanding by double-digits, but not at hoped-for pace

  • (as a result of the above point,) customer concentration increasing, not decreasing

  • uncertainty due to managerial succession (Liam Griffin has been answering questions during recent earnings conference calls - I’ve only followed SWKS a short time, so it could be longer; he strikes me as a sharp guy, but he’s unproven as a CEO)

  • the semiconductor industry is notoriously volatile (I’m diversified, and SWKS is my second-largest behind NVDA, but I own a handful)

  • QCOM increasingly targeting SWKS’ markets for competition (QRVO and AVGO are relevant competitors, although the list has shrunk from when the market was “components” instead of “solutions”)

  • SWKS has been investing a lot in its filtering capacity (first through the Panasonic joint venture and then through expansion in its new “Hitachi Glass” factory); is this a good investment? (I think it is.)

I note that Monkey is humble. He may describe his brain as pea-sized, but we all know monkeys’ brains are larger than that. And I think this particular Monkey’s “simian” mind is at least as prehensile as his tail!

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: NVDA, SWKS; AVGO and QCOM are on my watch list)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

24 Likes
5

I wrote: “(I peg air value in the $85-90 range, but I don’t really use Wall Street-type models)”

Yup! Pulled the numbers right out of the thin stuff! Gotta love the typos that a spell-checker ignores.

Actually, the range came partially from my interpretation of Value Line estimates, leavened with the estimate of an analyst for whom I have great respect.

But, as with any fair value estimate, please feel free to ignore it. The market sure does!

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: SWKS)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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6

My guess is that a lot of analysts are basing their Skyworks downgrade on Apple’s slower sales of iPhones, and they’re expecting iPhones to stay that way for at least another quarter.

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7

Basic growth ratings are poor:

ChecklistRating
Composite Rating 48 Fail
EPS Rating …91 Pass
RS Rating …9 Fail
Group RS Rating D+ Neutral
SMR Rating …A Pass
Acc/Dis Rating …C Neutral

Ranked 14Th in its industrial group(TXN, POWI are #1,2), but its group is 147 out of 197 - ouch.

EPS (GAAP?) last Q only up 9%. 0 quarters of earnings acceleration. Estimates falling, last Q earnings surprise was negligible, only a 4% EPS change expected for the year, sales up 2% last Q, RS is a 9, 3% decrease in funds owning the stock.

So these are all things growth investors would be disappointed in and looks like they may be leaving. It may take a while to attract them back in and help push up the stock in a sustainable way.

Don’t know if you can access this…
http://www.investors.com/news/technology/intels-apple-iphone…

. 1 chipmaker Intel (INTC) reportedly swiped a third of Apple’s (AAPL) iPhone 7 modems from Qualcomm (QCOM), benefiting Qorvo (QRVO) to the potential detriment of Skyworks Solutions (SWKS), but the U.K.'s decision to exit the European Union will slug all of them, Mizuho says.

On Friday, Mizuho analyst Vijay Rakesh downgraded Skyworks and Qorvo stocks to neutral, matching his neutral rating on Qualcomm stock. He estimates that all three are 75% tied to the smartphone market, unlike radio-frequency chip competitor Broadcom (AVGO), which is 22% exposed.

This is what AVGO looks like by the same standard:
ChecklistRating
Composite Rating 97 Pass
EPS Rating…93 Pass
RS Rating …72 Pass
Group RS Rating .B+ Pass
SMR Rating …A Pass
Acc/Dis Rating …B Pass
Much better.

EPS % Chg (Last Qtr) 26%
Last 3 Qtrs Avg EPS Growth 22%
EPS Est % Chg (Current Qtr) 23%
estimate revisions up
Last Quarter % Earnings Surprise 13.0%
3 Yr EPS Growth Rate 67%
Consecutive Yrs of Annual EPS Growth 4
EPS Est % Chg for Current Year 22%
Sales % Chg (Last Qtr) 119%
3 Yr Sales Growth Rate 62%
Annual Pre-Tax Margin 40.6%
Annual ROE 65.7%

All way better numbers than SWKS

(Still Long SWKS)

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Just to hedge my bets, I’m holding Broadcom, Skyworks, and NXP. I was thinking about Nvidia when it took a big jump, so I’m waiting for now.

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And Nvidia just took another big jump, probably because of their new video card that just came out.