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About Skyworks’ Current Financial Situation

March 07, 2014 | About:

Skyworks Solutions Inc. (SWKS), is a company dedicated to manufacturing radio frequency (RF) and mobile communication systems chips. It produces power amplifiers (PA), front end modules and RF products among other products for handsets and wireless infrastructure equipment. Its offering widens through a variety of products for both mobile and nonmobile devices (it includes, amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics).

A Little History on Skyworks

Skyworks is a result of a merger, on June 26, 2012, between Alpha Industries and the wireless division of Conexant Systems. David Aldrich took over as CEO when the merger took effect, bringing with him years of experience at executive positions in Alpha Industries.

Following the merger strategy, the company acquired SiGe Semiconductor and Advanced Analogic Technologies seeking to diversify and amplify its product portfolio and paying a reasonable primes for both firms.

Skyworks’ Bright Present and Future Problems

Due to the growth phase the company is currently in, it’s not using its free cash flow to pay out dividends, but rather investing it in R&D to broaden its product portfolio and move away from the market controlled by its biggest clients, Apple Inc. (AAPL) and Samsung.

Nonetheless, the company will be returning cash to shareholders. The management has recently announced a $250 million stock buyback schedule.

The company’s current well-being can only — or mostly — be related to the boom of the smartphones market. As a result, the company’s future is really tied to those of Apple and Samsung. If those companies don’t go well, Skyworks may lose crucial revenue sources.

Though this may be inevitable, Skyworks is the industry leader and it’s making plans to maintain itself in the top position of the market, while expanding its portfolio to non-mobile devices (chips used in routers and medical devices, amongst others) to gain share in that segment. In the latest years, high adoption of mobile devices and a booming market (lately, high-end smartphones) has benefited the company’s clients — such as Apple and Samsung — consequently benefiting Skyworks’ chip orders.

First off, the company has profited from the ongoing growth of the high-end smartphones which require more FA chips and at a higher price per unit. And having the scale and size advantages to take on big orders, the company can face more demand in a growing market that it’s yet from reaching its peak, all while it keeps a good relationship with another chip giants such as Qualcomm (QCOM).

But having as clients some of the major firms on smart-phone market, makes the company suffer from possible pricing pressure. And, it doesn’t let it grow into an inamovible market referent, since these clients switch between providers so as none of them can grow big enough to resist their pressure. That is what in the end ties Skyworks at the same time to the mobile market.

Compared to the Median

As long as the mobile market keeps growing like it has been for the past years, the company’s financial figures should continue to look good.

 

Skyworks

Industry Median

History

Op Margin

19.30

2.10

20.8

Net Margin

15.50

1.30

17

ROE

13.20

1.90

 

ROA

11.9

1

 

ROC

48.5

4.10

 

Revenue Growth

16.70

4.90

 

EPS

24.60

-2,60

 

F Score

8

   

- Skyworks has an F Score of 8, and has to date no debt.

- As we can see its operating margin is still expanding.

1394047606637.png

- We can se on the chart how the company’s revenue started to grow as the mobile devices market grew.

- We also see how, despite being tied to their biggest clients' fate, the company still has a top position on the industry, being one of the largest — if not the largest — names in the RF and PA industry.

Conclusion

As we can see in the chart, the company’s P/S ratio has been dropping since February 2011, as the company experienced the boom of the high end smartphone market, and reaching now a low of 3.84. The same goes for the P/E ratio; Skyworks now trades at a reasonable 23.2x P/E.

Looking at its numbers and clients, it still looks like this company is going to do well for now (short mid-future). The mobile market has already boomed but hasn’t reached its highest point yet. So, for now, Skyworks has to handle having two of the biggest companies in the industry as clients (and the risks that this implies). Moreover, it’s still to be seen how the company develops in new segments of the industry after the mobile boom, and if it’s able to find another product that needs its chips.

Disclosure: Damina Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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