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bbatts
bbatts
Articles (2) 

Contest: The Sky Is the Limit With the Skyworks Growth Story

Skyworks: the blooming of the wireless revolution

December 21, 2018 | About:

Company description and history

Skyworks Solutions Inc. (NASDAQ:SWKS) is simply a mid-cap company that builds components for wireless communication. It is a company that combines engineering, design, operations, sales and support across North America, Asia and Europe.

Its products include power amplifiers, front-end modules and radio frequency products for handsets and wireless infrastructure equipment. Skyworks’ specialty can be described in one hyphenated word, “wireless-communication.”

Introductory stats

  • Market cap: $11.58 billion
  • Share price: $65 (near 52-week low)
  • Price-earnings ratio: 12.84
  • Forward price-earnings ratio: 8.83
  • EPS: $5.02
  • Free cash flow per share: $4.51
  • Zero debt

History

  • 2002
    • Skyworks was born from a merger.
  • 2003
    • Introduces the industry's most highly integrated RF transmit front-end module
    • Receives ISO 9001:2000 certification; significant milestone achieved within one year of combined operations.
  • 2005
    • Captures a Key Helios(TM) Mini EDGE Design Win at Samsung; Top Tier OEM to Leverage World's Smallest Complete Dual-Chip Radio Solution for Next Generation Handsets
  • 2006
    • Captures Strategic Helios(TM) Design Win at MediaTek
  • 2008
    • Powers LG's Latest Generation of Multimedia Handsets, Wins LG Electronics' 2007 Best Supplier Award
    • Supports More Than 10 New Samsung 3G Handset Models - Including First European Mobile TV Slider Phone
    • Wins 2008 Silver Gateway Supplier of the Year Award from 2Wire
  • 2009
    • Acquires Axiom Microdevices
  • 2010
    • Enables 4G Smart Phones from HTC
    • Receives 2010 Best Quality Award from Samsung
  • 2011
    • Powering Multiple LTE Platforms
    • Powers Samsung's Next Generation Galaxy Smart Phones
  • 2012
    • Receives Best Vendor and Outstanding Delivery Awards from ZTE
    • Enabling World’s Smallest 4G LTE Datacards
  • 2013
    • Secures Reference Design with Texas Instruments for Smart Energy, Industrial and Networking Applications
    • Supports Samsung’s GALAXY S 4 Smartphone Platforms
  • 2014
    • Secures Hi-Rel Designs with Multiple Aerospace and Defense Manufacturers
    • CEO David J. Aldrich Elected Chairman of Board
    • Powers NETGEAR's Leading Router
  • 2015
    • Skyworks to Acquire PMC-Sierra for $2 Billion in Cash
  • 2016
    • Delivers World's Most Efficient Front-end Solutions for Internet of Things Applications
  • 2018
    • Announces New $1 Billion Stock Repurchase Program

Financial strength

The financial strength of this company is quickly evident, regardless of your approach. As a primer, let’s look at the "big five" over the last 10 years and make sure each metric is over 10% using GuruFocus data:

10 Year Average Growth (2009-18)

Status

ROIC

26%

PASS

Sales Growth %

16%

PASS

EPS Growth %

30%

PASS

BVPS Growth %

16%

PASS

Free Cash Flow Growth %

26%

PASS

The big-five numbers pass quite easily. These number are impressive, particularly when you add the fact that the company currently has zero debt.

Dividend data

For the past four years, the dividend annual growth is ~25% with more room to grow. With a dividend per share starting at 22 cents (2014) and growing to today’s $1.34 (2018), the dividend payout ratio is 27%.

Management

  • Liam K. Griffin (52) has been CEO since 2016, succeeding David J. Aldrich, who is now the executive chairman. Griffin had previously served as vice president and general manager of high performance analog and senior vice president of sales and marketing.
  • The management team continues to outperform others in this space with gross margins at 50.43% versus the 44% for the industry. Note: The fourth-quarter guidance is to increase them to 51.2%. Also note: There is a higher profit margin with 5G products versus 4G, which Skyworks is poised to exploit once the 5G infrastructure grows.
  • This year management recognized the current opportunity to bring shareholder value by issuing a $1 billion share buyback program.

Valuation

For the valuation, the bullets below are basic approaches using tools provided by GuruFocus.

  • Using the discounted cash flow (earnings-based) model, Skyworks’ price of $65 offers a 55% margin of safety, with a fair value of $142.
  • Using the discounted cash flow (FCF-based) model, Skyworks’ price of $65 offers a 50% margin of safety, with a fair value of $128.
  • Using past low and medium averages of price-earnings ratios, Skyworks appears to be at a 35% margin of safety.
  • Some might argue that price-sales ratio is more appropriate than using price-earnings for this industry. So, using past low and medium averages of price-sales ratios, Skyworks is at a 16% margin of safety.

NOTE: I understand that this article is to detail an idea where the investor can potentially double their investment in 12 months using only fundamentals with no regard to market sentiment, economic factors or momentum. That is a tall order, particularly solely using valuations, which (Ben Graham and Warren Buffet teach) can take years to realize. That being said, you will not see any chart illustrations, so I encourage readers to use additional skills/research/techniques along with this material to optimize potential entry points and returns.

Risks

The risks with this company and industry are as follows (listed from most impactful to least). The list below excludes black swan events.

  1. Apple (AAPL) is Skyworks' largest client. Apple alone generates about 40% of Skyworks' revenue. If the iPhone falls out of favor with consumers, this would reduce Skyworks' revenue. Granted, this could be said about any company with similar clients, but since Apple is such a high percentage of its revenue, this would have a greater impact. Note: If you have ever spoken with an iPhone user, you would see their level of brand loyalty, making the likelihood of this happening very low, but it is still worth mentioning as a potential risk.
  2. Samsung is also a very large client, and one who could elect to produce the hardware in-house. Likelihood is low, but would have high impact on revenue.
  3. With the "Trade War" with China, Skyworks’ existing footprint in China, the proposed 25% tariff would affect margins by an estimated 2% according to operations director during an earnings report. Management has a risk-management plan to mitigate the effects of a higher tariff, which would be to shift production locations. Without a shift, the 25% tariff would bring gross margins from 50.4% to 48.2%. Not earth shattering, but substantial.
  4. A delayed or slowed adoption of 5G technology infrastructure due to imposed rules, regulations or standards would also delay payback time for investors.

Moats

The moats below are listed from the strongest to weakest.

  1. Entry fees into this industry are extremely high and time sensitive, so a new competitor would be at a great disadvantage with imposed monetary, quality and time constraints.
  2. It has top performance in the industry (currently), increasing battery life in mobile.
  3. Competitive pricing moat: Skyworks offers low-cost pricing even with 50% gross margins. With margins this high, there is wiggle room to potentially discourage competitors, if needed.
  4. Positioning and relationships: Skyworks is currently poised and ready with last 5G technology and improving design, operations and margins. They have strong relationships with the biggest names in the cell phone industry (Apple, Samsung, LG, HTC and so forth).
  5. Brand name and management: It arguably has the coolest name in the biz: Skyworks.

Outlook

The Skyworks outlook is where this opportunity stands out. But first, let’s cover two of the short-term events that enhance this uniquely timed entry point.

Short-term events

The two short-term events that have caused the recent 44% share-price decline in 2018 from $115 to $65 are:

  1. The trade war with China (the latest Trump demand is for a 25% tariff, an increase from the current tariff of 10%).
  2. Apples’ iPhone sales slowing due to cell phone market saturation (as Skyworks continues to expand and diversify, this effect is diminished).

I will not attempt to prognosticate the outcome of either event, but both must be mentioned as catalysts for the current share pricing.

Long-term outlook

In a world where connectivity is increasing exponentially, Skyworks has the technology and experience to support the emerging markets simultaneously. There are two main buzz words that you will hear when researching wireless communication, and they are: 5G and IoT (Internet of Things). While 5G is a technology, IoT is just an acronym to describe the trend of "everything" being connected in one way or another.

In case you don’t already know, 5G is 10 to 100 times faster than today’s 4G technology (wireless communication). It’s simple: The underlying technologies essentially allow for the existence and/or improvement of markets such as automotive communication (e.g. autonomous driving), the connected home, smart energy, wearables, communicating medical equipment and countless applications in the consumer electronics (and mobile device) space.

While autonomous vehicles are years away, the connected home market is now getting traction. For example, this year alone, you might have started to see digital home security systems with video at your front door, or programable, vacuuming robots, Wifi-controllable light bulbs, outlets, appliances and the voice activated devices to command all of your devices and lights from any location. In short, the wireless revolution continues with no end in sight.

Summary

Regardless of which "wireless" market grows the fastest, there is one thing that is certain, which is: Wireless communication (connectivity) will only grow faster and more reliable. Consumer demand will only increase as new uses, ideas and innovation continue. For example, can you imagine going back to using a 28.8 KB dial-up modem, especially now that you are accustomed to connection speeds of over 350 times faster with minimal drop-offs? 5G will be a large player here for many years to come. While consumers quickly grow accustomed to higher speed connections, dependability and consistency, Skyworks will be serving those needs and wants well into the future.

Disclosure: I am long Skyworks.

About the author:

bbatts
I use a hybrid value-momentum-technical-revert the mean-type style investor. I also trade options for added income.

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