Marvell Technology Group (MRVL) has its fingers in several pies, but nearly half of its revenues still come from the chips with embedded software that run traditional hard drives. Unfortunately for the company those types of hard drives are not present in smartphones and tablets. Even more unfortunate for Marvell is the fact that their largest customer, Western Digital (WDC) is not really trying to compete by building better flash or solid state drives, but is instead doubling down on hybrid drives. If hybrid drives take off, Western Digital and Marvell along with them will no doubt see a swift turnaround.
However, even if Marvell's largest customer crumbles and fades, Marvell will remain poised for growth. I believe that at its current price Marvell is an excellent defensive value opportunity for conservative investors. Here's why.
Marvell's chips are found in mobile devices, like the new Microsoft (MSFT) Surface tablet. Its HD media processors power the new Google (GOOG) TV. Its processors also power a wide array of equipment involved in LED lighting, smart appliance power management, cloud networking, and storage, just to name a few.
Marvell didn't wait for PC sales to decline to start expanding its product offerings. It has been pushing into new frontiers since the beginning. Whatever the next big thing is, if it contains processors, chances are good that it will contain Marvell's.
The company is a fabless integrated circuit company that relies on outside manufacturing of its end products. This allows it to be extremely nimble when developing new products while focusing capital on research, development and marketing.
Despite a wide array of products, the company uses a highly integrated development approach. Patented technology developed by Marvell is typically used in several different products. Not only will the next big thing most likely involve Marvell's processors, but the company won't need to bet heavily on exactly what it might be.
Despite a steep downturn in sales over the past year, the company has continued to increase its research, development, sales, and marketing budgets without incurring debt or diluting shares. The company has an excellent history of maintaining a strong balance sheet. During its history as a publicly traded company, Marvell's current ratio has fallen below 2 only once, in January of 2007. As of October 31, 2012 its ratio of current assets to liabilities was 4.6, which is about normal for the company. Furthermore, and perhaps most importantly, the company is carrying no long term debt.
Marvell's CFO of four years, Clyde Hosein, recently resigned. The company's Corporate Comptroller, Brad Feller, is currently serving as its Interim CFO while the company looks for a suitable replacement, so I will be reading the Ks and Qs extra thoroughly over the next several quarters.
Dr. Sehat Sutardja is a semiconductor legend. Sehat and his brother founded the company in 1995. As a pair, they continue to be active in nearly every aspect of the company's operations, and they should be. The brothers own a combined 85 million shares. According to the company's most recent 10-K, the functional heads of each department report directly to Sehat and he makes all decisions regarding allocation of resources and other operational decisions.
Marvell has been taking advantage of its currently depressed share price to buy back shares. Since the beginning of 2011 the company has reduced the number of outstanding common shares by 18.9%, from 659M to 535M.
Marvell has also begun paying a cash dividend of $0.06 per share. At its current price that is a yield of about 2.7%. Unfortunately, by the time you read this it will be too late to take advantage of the December 21, 2012 payment. Although this will be only the third dividend payment in the company's history, I feel that future payments are a safe assumption given the company's financial track record.
At its current price of $8.80 Marvell is a good value, but I am fairly certain that this Nasdaq 100 component will dip lower going into the new year on general macroeconomic and fiscal cliff fears. I missed the boat when its price hit a low of $7.05. I would kick myself if I bought in now and its price tanked again along with the broader market. I've got a limit order set for $7.99 that's good until mid January. If the order doesn't execute by then, I'll reevaluate this opportunity, and you can expect another post.