SWKS - May 2015 Portfolio Review
At year-end, I reviewed each of my stocks, and talked about what happened with the stock since I bought it. Now that we are in May, I thought I’d bring as many of them as I have the energy for up to date. I’ll start with Skyworks.
Skyworks is my biggest position at 16.1% of my portfolio, but at first I didn’t think of it as an almost-forever, high-conviction, stock like BOFI. It’s a semiconductor chip company, so I felt that, almost by definition, it could fall out of favor, get commoditized, have its margins squeezed, and all the rest. But as it has continued to increase margins, instead of seeing them fall, and shows no signs that other companies can successfully compete with it, I am gradually revising that assessment. I had trimmed it back some to keep it from getting over 16%, but I changed my mind and bought back most of what I had trimmed, and I’ll let it grow for the time being.
I didn’t buy such a large position, but it has grown into its position size. I took my first position when it was recommended by one of the MF paid services, back in August of 2014 (nine months ago). I took the majority of my position at $52, added about $57, then it fell back to $46 when some other semiconductor company announced bad earnings. SWKS responded to this by pre-announcing increased estimates, and the price has gone straight up from there, now at $98.30. My initial position is up 89% in nine months.
This is a company in the Internet of Things world, and its growth has incredibly accelerated recently. Here’s what their revenues have looked like since mid-2012.
2012: xxx xxx 421 454
2013: 425 436 477 505
2014: 481 587 718 806
As you can see, at first revenue was going up $50 million a quarter, year-over-year, but during the last four quarters that accelerated to $150 million, then $240 million, then $300 million and $280 million! Last quarter’s revenues were up 58% yoy! That’s revenue! Up 58% organically! That’s something that’s truly rare to see in your lifetime in the stock market, which helps to explain why I haven’t sold any.
Adjusted earnings over the same quarters have been
2012: ----- ---- 054 055
2013: 048 054 064 067
2014: 062 083 112 126
While earnings always grew year over year, you see the same kind of remarkable YoY acceleration in the past four quarters here too. It’s rather astounding!
Here are trailing earnings from June of 2013 to Sept 2014:
Thus the current trailing earnings of $4.36 are up 76.5% from $2.47 a year ago. The PE is $98.3 divided by $4.36 = 22.55, which is incredibly low for a stock growing so fast. The 1YPEG is 0.29, which is even more incredibly low, and signals a stock in extreme buying territory.
So what keeps the price so low? It’s price anchoring! People look back at the price and say: “The price was $47 a year ago. It’s up 108% in a year. It must be over priced! Bound to fall! Momentum stock!”
But earnings are up 77% from a year ago, revenues are up 58%, and the company is growing much faster than it was a year ago. It’s also a much stronger and proven company. I added some last week.
In the Dec Conference Call They were almost euphoric about how things are going. I think this captures it:
In general these analog architectures are getting much more complex and that’s across our entire customer base in mobile and non mobile. But in terms of our largest customers this provides a tailwind for us. We have consistently more addressable content with each successive design. And in fact we continue to look out two to three years as we become more of a system producer or engaging very early in architectural selection. So we have very good visibility in terms of how the architectures are going. And so I guess I would say our clearly stated goal for a long time has been to gain content with each model, and as an incumbent we have been very successful in maintaining, and in fact growing our footprint, and that’s aided of course by complexity that all of our customers need help in solving, particularly on the analog side and that’s our strength.
What that says to me is that once they get in with a customer, they are in for life, because they become an integral part of a very complex system, and replacing them by a competitor who is marginally cheaper would be very expensive and questionable. They saw margins gradually rising instead of falling.
Here are some remarks from the last conference call:
Turning to our June quarter, we expect revenue to be $800 million, up 36% year-over-year. At this revenue level, we anticipate gross margin to be 48%, representing a sequential increase from 46.7%, and that’s driven by a combination of growing adoption of our products, increasing global scale, and enhanced vertical integration and our ongoing operational initiatives. These factors have created new baseline for our business model, providing a path to continued margin improvement ahead. And all of this puts us on a firm path towards our target of at least 50% gross margin for the company.
This is crucial!!! The doom and bloomers say, “This is a chip company. Their fate is to be commoditized and have their margins squeezed to nothing.” Margin expansion means that that is clearly not happening!
Across the board, we see more content opportunities in each successive generation of device and integrated solutions displacing conventional discrete components. As this happens, a host of component providers, who lack our technology brand, our integration capabilities and system expertise, are simply unable to keep pace.
They announced a $300 million stock buyback (They have $800 million in cash that they can use). They are also paying a small dividend. They are making so much money they don’t know what to do with themselves.
To sum up, I’m holding this one for a long ride, but I will keep a close watch on it.
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