Now let’s look at Skyworks
Skyworks is my second biggest position, but it’s NOT a forever-high-conviction stock, like BOFI. It’s a semiconductor company, so, almost by definition, it can fall out of favor. But for now it’s doing great. I didn’t buy such a large position, but it has grown into its position size. I took a position in this company when it was recommended by MF One (or Pro, I can’t remember), back in August of this year. 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 $74.50. My initial position is up 43%. I stopped adding at $62.75 but haven’t sold any.
This is a company in the Internet of Things world, and it has incredibly accelerated in the past five quarters or so. Here’s what their revenues have looked like the past nine quarters
2012: xxx xxx 421 454
2013: 425 436 477 505
2014: 481 587 718
As you can see, at first they were going up $50 million year over year, but the last two quarters they increased by $150 million and then $240 million! In fact the last two quarters they were up SEQUENTIALLY by $100 million and $130 million!!! (That helps to explain why I haven’t sold any). Adjusted earnings over the same quarters have been
2012: xx xx 54 55
2013: 48 54 64 67
2014: 62 83 112
While earnings always grew year over year, you see the same kind of acceleration in the past two quarters here too. It’s remarkable!
Here are trailing earnings from June of 2013 to Sept 2014:
2.10
2.21
2.33
2.47
2.76
3.24
Thus current training earnings of $3.24 are up 46.6% from $2.21 a year ago. The PE is 74.5/3.24 = 23
At the end of the December quarter, as you can see from the table of earnings, earnings of 117 for the quarter, up 50 cents from the year before, is conservative. That would give training earnings of 3.74 and a PE of 19.9. They’ll likely even do a little better.
Here’s a condensation of the original recommendation, and perhaps from some other posts:
Skyworks Solutions makes technology that powers wireless connectivity in everything from Apple and Samsung smartphones and tablets, Medtronic medical devices, to Google and General Electric products. Dubbed the “Internet of Things,” the world is starting to connect billions of new objects to the Internet, and Skyworks is uniquely positioned to benefit. Not only does it serve all of the top-tier mobile computing device makers, but Skyworks is also diversified across industries to serve more than 2,000 customers.
The company sells more than 2,500 high-performance analog semiconductors and related products (supported by nearly 1,000 patents), including amplifiers, attenuators, receivers, switches, diodes, modulators, GPS power and voltage regulators, and more. They’re often sold together into a phone or any connected device. Skyworks earns industry-beating operating margins of 30.5% selling specialized solutions to giant customers with growing connectivity needs.
“We’ve spent the last decade investing significant resources and leveraging our technology to expand our presence in traditional analog markets like automotive, medical and industrial. We have established significant traction in these higher-margin growth avenues, and we see tremendous opportunity ahead.”
Whatever device is being connected to the Internet, the smaller, more complex, and more efficient the technology needs to be, the more it benefits Skyworks. Not only that, but the more data flowing through networks, and the more connection nodes needed, the more Skyworks products are needed: “Complexity for us drives profitability, and there are fewer and fewer people in the space that can do it.” Given this, Skyworks expects profit margins to continue to move higher. It is helped in this regard by having its own manufacturing facilities for many differentiated products, and contracting the rest.
Following the company’s most recent earnings report, the CEO said, “Skyworks is entering a new and exciting growth phase driven by global wireless proliferation and the Internet of Things. Quite simply, we are capitalizing on the macro trend to connect virtually everyone and everything, all the time.”
We seek financially strong companies with growing market opportunities and proven management. We want to see strong growth in free cash flow as revenue grows. That’s particularly true (and rare) with semiconductor companies, which too often grow revenue but struggle to balloon profits at the same time. Here, Skyworks stands out. Finally, the balance sheet is strong, with $893 million in cash and no debt.
In the July conference call, management spoke of hitting $5 per share in earnings before long, as revenue grows and margins float higher.
Yet this is all short term. It’s the long term that interests us. Skyworks plans to continue to expand its portfolio, is investing in sensors, and wants to add to its Internet of Things portfolio, perhaps with acquisitions. The company foresees “sustainable above-market growth” as far forward as it can look, and leans conservative with its long-term guidance of annualized industry growth rates in the mid-teens. Its gains in market share partly come at the expense of single-component manufacturers, who are getting squeezed by increasing complexity that asks for full, or modular, and specialized solutions like Skyworks provides.
Skyworks’ CFO said in July, “We take a very long-term strategic view of our business, and we think we’re positioned extremely well. I don’t think we’ve ever been positioned as well as we are today for the long term.” We make this investment with solely the long term in mind, too. If management continues to execute, demand should flourish, and it’s plausible our investment at least doubles in five or six years.
So much of revenue came from Apple that it has been good to see the business steadily diversify into what it calls “broad market” opportunities (medical, auto, industrial, etc). It still has a long way to go to not rely on mobile for much of its revenue, but lately its broad market revenue is growing as quickly as mobile, and that’s very good. Meanwhile, its position in mobile is very strong, too, of course, and we’ll take that, too.
But it wants to be a stable company with very diverse revenue streams to smooth out the bumps that are typical in more concentrated chip companies.
I like SWKS better than SWIR and INVN (two other “Internet of Things” stocks, broadly speaking) partly because it has much stronger financials already, and is expecting expanding margins (somewhat of a rarity in the chip world) and has very strong free cash flow and a reasonable valuation. I think it’s on more solid ground than younger competitors with much lower revenue and little income to speak of. It also has a long customer list for its analog products that should keep letting it roll into IOT business with them more easily.
Back to my notes:
Oct 2014 - Raised estimates
In response to the warning by a fellow chip maker that tanked the chip market, Skyworks just raised their 4th quarter estimates from $1.00 to $1.08. Analyst estimates were $1.01. And I’m sure, if they raised to $1.08, they expect to beat it.
Last year they made 67 cents. So $1.08 would be up 61%. Earnings will be in a range of $3.50 for the year, up 50% for the year, and with a price of $45 yesterday, that’s a PE of about 13. Now, that’s my kind of stock.
Nov 2014 – Announced Sept quarter results
Revenue of $718 million, up 51% yoy and 22% sequentially
Adj Operating Margin up to 32.8%, and up 81%
Adj Earnings $1.12
Dividend increased by 18% to 13 cents
Outlook for Revenue $770M, Adj Earnings $1.18 next quarter.
Outlook for next quarter
Fiscal 2014 was a record year for Skyworks as we exceeded key metrics in each and every quarter and crossed the $2 billion revenue threshold. We are now scaling to more than a $3 billion revenue run-rate with annualized non-GAAP earnings per share approaching $5.00. Specifically, for next quarter, we anticipate revenue to be up 52% year-over-year to $770 million with further margin expansion yielding $1.18 of adjusted earnings.
Doing great!
Nov 2014 – Announced a $300 million stock buyback (They have $800 million in cash that they can use).
To sum up, I’m holding this one for a long ride, but I will keep a close watch on it.
Saul