Skyworks Solutions Inc. (SWKS, Financial) is an American company that produces semiconductors for connectivity among users of wireless handsets. The product line includes power amplifiers, filters and front-end modules. Its customers are mainly big smartphone manufacturers.
It currently has very high ratings from GuruFocus for its financial strength and profitability and growth, as shown in this screenshot from its dashboard:
The company enjoys a 4.5-Star (out of 5) business predictability rating, indicating it has consistently increased its revenue per share and EBITDA per share over the past 10 years.
Based on what I call the Macpherson model, this would qualify—subject to detailed research—as a great company (based on Warren Buffett (Trades, Portfolio)’s concept of buying great companies at great prices). The model, based on Thomas Macpherson’s article, "Defining Valuation: DCF and Other Tools Part 2," calls for:
- No debt.
- Return on assets: at least 15% per year, averaged over the past 10 years.
- Return on equity: an average of at least 15% per year over 10 years.
- Return on capital: again, an average of at least 15% over 10 years.
Given that Skyworks meets all these criteria, it can at least tentatively be called a great company. But a great company is only the first half of an investor’s puzzle; the second is the price. That’s defined by discounted cash flow, which comes in three variations:
Free cash flow DCF is based, obviously, on a company’s free cash flow; the second is earnings-based DCF; the third is projected cash flow and used only when the company does not have consistent revenue and EBITDA (earnings before interest, taxes, depreciation and amortization). As noted, Skyworks does have consistent flows.
Looking at the details:
- On free cash flow DCF, its intrinsic value is $158.60 and its current value is $109.32 - that's a 31% discount or margin of safety.
- For earnings-based DCF, the intrinsic value is $125.55, also above the current price of $109.32.
Arguably, then, Skyworks Solutions is a great company and available at a great price.
But, why is a great company available at a great price? A great company should sell at a premium, not at a discount. This 10-year chart shows the share price grew rapidly—until a couple of years ago:
Now, a three-year chart takes a deeper look into that recent dip in the share price:
Note the price on June 22, 2015 was $110.92 and, more recently, at the close on March 19 was $109.32. Of course, climbing out of a slump also counts, but one thing is clear: We need to know what has been going on at Skyworks over the past three years.
According to a February 2015 article at Zacks, it was not just Skyworks that took a hit:
“After hitting all-time highs in December, the industry has started to pull back this year. One of the reasons might be the not-so encouraging earnings. Most of the well-known industry players have either just managed to beat or meet the Zacks Consensus Estimate on earnings while many missed the top line. Further, the guidance was also not so inspiring.”
In a Motley Fool article last month, Matthew Cochrane added this explanation for Skywork's particular share prices:
“The share price continues to amble, even as the company excels, because Skyworks has been given the dreaded label of being an Apple Inc. (AAPL, Financial) supplier. As such, every time Apple sneezes, Skyworks is diagnosed with the flu -- as if it's a bad thing to have the world's best-selling smartphone and most-recognized brand as your best customer.”
Note, in this article, The Motley Fool reported it did not own Skyworks, but it had a list of 10 stocks it liked better. However, in a recent article dated March 5, it wrote, “The Motley Fool owns shares of and recommends Skyworks Solutions.”
As seen in the price charts, Skyworks price has had a resurgence in the past year. Its revenue and earnings have jumped significantly, and investors like the new, $1 billion stock buyback plan.
Looking ahead, observers expect the company to get a significant boost from the rollout of 5G technology for mobile devices, including smartphones.
Grant Gigliotti, in an article at SeekingAlpha earlier this year, reported Skyworks is diversifying its client base, so it will not depend so much on Apple. He also reported the company is now focused on 5G and the internet of things, which are high growth areas.
Among the gurus followed by GuruFocus, those who traded the stock in fourth-quarter 2017 all added to existing positions or established new positions:
Currently, 10 gurus own Skyworks stock; the biggest holding is that of Manning & Napier Advisors Inc. with more than 2 million shares.
GuruFocus reports institutional investors hold 69.25% of the company total shares outstanding, and nearly 90% of shares in the float.
Regarding short interest, the short float comes in at 4.6%.
Among analysts followed by Reuters, the consensus is outperform, based on 16 outperforms, eight buys, three holds and one underperform; there are no sell recommendations from this group.
Conclusion
Skyworks Solutions deserves a place on the watchlists of investors, and due diligence for those considering a purchase. From the limited information available, it seems the stock got caught in the expectations of investors and an industry coughing fit.
However, there is a caveat: buying Skyworks is a bet on demand for 5G and the internet of things. On the surface, at least, both appear to be on the growth curve (remember the lines around various city blocks when the latest iPhone upgrade came out), but there may be more coughing fits before they become firmly established.
That needs to be balanced with the current price, which is listed as 31% below the intrinsic value and may rise rapidly once 5G production and sales begin in earnest (assuming it does).
Certainly, there is a lot to be said for Skyworks. As noted, it has financial metrics that suggest a great company at a great price. If only other stocks had that same starting point.
Disclosure: I do not own shares in any of the companies listed and do not expect to buy any in the next 72 hours.
