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A Marvell(ous) opportunity
Posted by: Nicolas73 (IP Logged)
Date: October 2, 2012 06:34PM
The company: Marvell Technology Group Ltd. (MRVL) is a System-on-a-Chip (SoC) controller devices developer.
They have a wide product portfolio ranging from data storage controllers to Ethernet switching and transceivers, to mobile controllers, and much more.
Marvell is a fabless company, so the real value here is their know-how (not production plants, for example).
Marvell is one of Einhorn’s favorite picks.
Here’s what he wrote, referring to MRVL, in his last shareholders letter:
“MRVL gave tepid guidance and Wall Street has modestly reduced its estimates of earnings per share from $1.25 to $1.15 this year and from $1.45 to $1.40 for next year. MRVL has about $4 per share in cash and now trades at roughly 5x next year’s earnings net of the cash on the balance sheet”
I’m prone to think that their guidance is, especially for the next year, quite conservative.
Why? One of the widespread concerns about Marvell is their technological specificity.
That is, most of the analysts believe that they’re too linked to a particular technological trend, and everyone knows that in this business there’s nothing like a predictable trend.
Actually, Marvell has a portfolio of products covering most of the electronic products business.
Just to make an example, let’s consider the data storage division.
Marvell was well known in the past as an hard-disk controller producer, so everyone trying to project a PC sales decline or a shift towards Flash-based products could think that this would severely impact MRVL business results.
But MRVL is also a Solid State Drive (SSD) controller producer. An SSD is a Flash-based device used to store non-volatile data and often used by OEMs to replace an HDD.
Moreover, MRVL is not only producing chips for the PC market, but also for the enterprise server market, which has grown exponentially in the last years (and will probably continue to grow due to the enormous data storage space demand).
Another concern is that one of the bigger MRVL’s customers in the mobile segment is Research In Motion (RIMM).
I think RIMM’s influence on MRVL business is overrated. Here’s why:
1) The mobile business represents around one-third of MRVL revenues (data storage is slightly less than 50%).
2) The company has widened its customers base, becoming significantly less depending on RIMM’s results.
The recent disappointing results are not related to a specific Marvell weakness, but to the fact that most of their customers are simply shifting most of the orders towards the end of the year, in the attempt to better manage the current market weakness and to keep inventory levels low.
Coming back to Einhorn’s considerations, the stock is currently trading at $9.27, considerably lower than his first buy (in third quarter 2011) at $13.35 per share (Greenlight continued to add to its position during last quarters, showing an high degree of conviction).
At these prices the stock is trading (net of cash) at less than 4x their EPS estimate for next year!
Share repurchases and dividends
Here’s what Einhorn said about MRVL's share repurchase program:
“Most of the cash is excess, and the company has commenced what we hope will be an aggressive share repurchase program.”
And here’s what the company said about this topic in the last report:
“Under the share repurchase program, Marvell repurchased approximately 20 million shares for a total of $250 million in the second quarter of fiscal 2013. Over the past eight quarters, Marvell has repurchased and retired approximately 127 million shares, or about 19 percent, of its outstanding shares demonstrating its commitment to returning shareholder value.”
What if the company is aggressively repurchasing shares at these prices? (This is another reason why I think that the guidance for next year is a bit conservative.)
MRVL has also decided to deploy cash to its shareholders through dividends, which they first announced on May 17, 2012.
At current prices, the yield is 2.61%.
A quick look at the latest quarter
The company reported its second fiscal quarter (second quarter 2013) on Aug. 16.
Revenues were $816 million, GAAP net income was $93 million, with EPS of $0.16 (non-GAAP net income was $142 million and the EPS was $0.24.)
MRVL currently has $2.13 billion in cash and equivalents, and no debt.
Their diluted share count decreased from 640 million exactly one year ago, to 570 million on July 28, 2012.
Considering Marvell’s next-year guidance, their share repurchase program and the huge cash balance, my target price for the next year ranges from mid-teens (a conservative estimate) to the low twenties (in case of multiple favorable business events).
I am long MRVL