Marvell Technology - Investors Are Anticipating A Further Recovery

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 |  About: Marvell Technology Group, Ltd. (MRVL)
by: The Value Investor

Shares of Marvell Technology (NASDAQ:MRVL) continue their march higher so far this year, as shares are trading at nearly double the levels at which they started the year.

Shares could easily see more upside if current momentum continues, although a correction could easily happen if green shots are not translating into sustainable growth. With not enough margin of safety for to either the long or short thesis, I have to stay on the sidelines.

Third Quarter Results

Marvell Technology generated third quarter revenues of $931.2 million, up 19.2% on the year before. Analyst were looking for revenues of just $870.6 million.

The company posted earnings of $103.2 million, up 49.9% compared to a year earlier. On the back of sizable share repurchases, earnings per share have risen sharper and are up by 75% to $0.21 per share.

Non-GAAP earnings came in at $163 million, with non-GAAP earnings coming in at $0.32 per share. Analysts expected the company to earn $0.25 per share.

CEO and Chairman Dr. Sehat Sutardja commented on the third quarter performance, "Our results in the third quarter were above the high-end of our guidance mainly due to better demand from our mobile, wireless and storage customers. We continue to make excellent progress in our end markets with new innovative products and remain committed to delivering above industry revenue and profit growth as we head into next year."

Looking Into The Results

While growth has been spectacular on an annual basis, revenues were up a decent 15% from the second quarter as well.

Despite the strong revenue growth, gross margins saw some pressure falling by two percent points to 50.1% of total revenues.

Operating income rose by 170 basis points to 10.2% of total revenues. The company saw solid operating leverage with costs categories being stable or increasing much less compared to revenue growth.

Combined with share repurchases, after Marvell retired over 10% of its share outstanding over the last year, earnings per share saw massive growth. Reported earnings of $0.21 per share, compare to second quarter earnings of $0.12 per share and last year's earnings of a similar amount.

Fourth Quarter Outlook

Marvell sees fourth quarter revenues between $880 and $920 million. At the midpoint of the range, revenues are seen down by 3.3% on a sequential basis, but up 16.1% on the year before.

GAAP earnings per share are seen between $0.14 and $0.18 per share, while non-GAAP earnings are seen between $0.23 and $0.27 per share.

Analysts were looking for fourth quarter revenues of $846.3 million on average, and earnings of $0.23 per share on a non-GAAP basis.

Valuation

Marvell ended the third quarter with $1.80 billion in cash, equivalents and short term investments. The company has no debt outstanding for a solid net cash position.

Revenues for the first nine months of the year came in at $2.47 billion, up 3.3% on the year before. Earnings fell by nearly 15% to $218 million in the meantime, resulting in diluted earnings of $0.43 per share.

At this pace, annual revenues are seen around $3.4 billion as earnings are seen around $300 million.

Trading around $14.50 per share, the market values Marvell Technology at $7.1 billion. This values operating assets of the firm at $5.3 billion. As such, operating assets are valued at 1.6 times annual revenues and 17-18 times annual earnings.

Marvell pays a quarterly dividend of $0.06 per share for an annual dividend yield of 1.7%.

Some Historical Perspective

Long term holders in Marvell Technology have seen very modest to poor returns. After peaking at $35 in 2006, shares have mostly traded in a $5-$20 trading range, currently trading at the midpoint of this range at $14.50 per share.

After initiating a dividend last year, and witnessing improved operating conditions, shares have already nearly doubled this year.

Between the fiscal 2010 and 2014, Marvell is expected to increase its annual revenues by a cumulative 20% to $3.4 billion. Earnings are expected to stagnate around $300-$350 million after peaking at $900 million in 2011.

The company retired nearly a quarter of its shares outstanding over this time period.

Investment Thesis

Marvell's strong performance is helped by increased sales for flash drive, mobile and wireless devices. Some of Marvell's customers include fast growing drive makers including Western Digital (NASDAQ:WDC) and Seagate Technology (NASDAQ:STX).

The company continues to make progress with its innovative products according to CEO Sutardja. He stresses that the company remains committed to deliver above industry average revenue growth and earnings growth into the new year.

The strong performance of Marvell this year is noticeable as one of its key customers, BlackBerry (NASDAQ:BBRY) is facing a big implosion, with no real prospects for any significant recovery anytime soon.

Back in August of this year, I last took a look at Marvell's prospects after the company released its second quarter results. Trading around $12 per share, I concluded to be cautious after this year's strong momentum.

In hindsight I have been too cautious as shares have rallied another 20%, mostly in anticipation and on the back of the third quarter earnings report. The third quarter showed a significant acceleration of both revenue and profit growth, with operating leverage being greater than I anticipated.

While there is still uncertainty about the $1.17 billion claim, regarding infringement on patents held by the Carnegie Mellon University, such a claim would come down to about $2.30 per share. This remains obviously a worry, yet in the most likely case a settlement at a much lower amount can be reached, allowing investors to be relieved.

During the quarter, Marvell slowed down the pace of share repurchases to 6.1 million shares, for a total of $71 million. Over the past three years, the company has been repurchasing its shares at a pace of 17-18 million shares per quarter. Even now, the company repurchases its shares at a 4-5% pace per annum, on top of which investors receive a 1.7% dividend yield.

Right now I remain cautious as there are both arguments for a long as well as a short position. If momentum and growth continues, and Marvell could earn about $500 million per annum, sparking a rally towards $20 per share. On the other hand, shares could fall back towards $10 if a big claim is awarded to Carnegie and continue growth will not materialize.

With no margin of safety in my opinion to either of these cases, I remain on the sidelines, but congratulate management and investors with a strong 2013 so far.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.