Here is a value name that I hear often. Take this as an exercise to go through the numbers and facts over the weekend and compare your assessment with mine.
Start by entering MRVL into the Stock Analyzer and away we go.
A PDF tearsheet is provided at the end for you to follow along if you are not subscribed to the OSV Stock Analyzer.
Marvell Technology Group (MRVL)
Marvell makes cool things
Marvell is a fabless semiconductor company. Without getting into the technical details of exactly what they do, the simple explanation is that Marvell makes things like storage controller chips for HDD and SSD and chips for mobile phones.
Strong balance sheet with no debt.
Cash from operations is being used to buy back shares at a fast rate. The share count has decreased from a peak of 650m in 2011 to 500m today. Expect more buybacks for the rest of this fiscal year as well.
The cash is also being used distribute dividends. Yield is 1.84%, which isn’t going to put the company’s cash position in jeopardy, but don’t expect Marvell to become a dividend play.
Despite the struggles Marvell has been facing, its cash conversion cycle is better than it looks. It is well below the average 51 days sitting at 34days in the TTM. Don’t expect it to get anywhere near the glory days of 2011 when it was 25. Think of that year as an anomaly.
Earnings quality is clean and the company scores a Piotroski score of 7.
David Einhorn has been a longtime holder.
Marvell operates in a highly competitive and commodity space. Their wireless segment saw declines of 24% in Q1 and although the CEO is optimistic about the segment (what CEO isn’t?), Marvell has to compete against established and proven competitors such as Qualcomm (QCOM), Samsung (GM:SSNLF), Nvidia (NVDA) and now Intel (INTC).
The push towards the wireless segment is increasing R&D higher. Q1 numbers show that R&D expense came out to 38% of revenue compared to the previous comparable quarter.
The income statement is unstable with margins fluctuating wildly. 2011 net profit was 25% and has come down to 8.5% TTM.
ROE has dropped to 6% from a peak of 16% in 2011. The DuPont model confirms that the drop in ROE is a result of the fall in net profit more than anything else.
CROIC has also fallen quickly from 39% in 2011 to to 18% TTM. 18% is still good, but the speed of the drop is alarming and the way business has been going, I wouldn’t be surprised if it drops further this year.
Marvell makes regular acquisitions, which is increasing goodwill. Goodwill now makes up 40% of the assets. Although P/B may be 1.5, the Price to Tangible Book value is double that at just under 3.
Despite the company displaying poor fundamentals and performance, the CEO has been having a stellar year in terms of compensation. No bonus in 2011 and 2012, which is obvious, but the salary increased from $691,731 in 2011 to $841,346 in 2013. The generous stock awards and options make for nice pocket change.
Well Paid CEO for Poor Performance
Marvell Valuation Estimates
Estimating the FCF for this fiscal year is difficult, but what I do know is that FCF will continue down. TTM is $500m, but that includes 3 quarters from last year so the TTM is not a reliable figure.
Rather than project, I want to know what the market implied values are.
Performing a reverse DCF using owner earnings of $344m, 9% discount rate, the market implied growth rate is 7%.
Do the same with the Graham formula. Analyst estimate of $0.84 EPS, corp bond rate of 4.10% gives a market implied growth rate of 7.5%.
Valuation wise, the current stock price is pricing in 7% growth going forward. It’s on the border of cheap and expensive.
Here are the figures for some other default numbers I ran.
Click here for the Marvell Stock Analyzer Report.