Marvell: A Marvellous Story

Includes: ALLT, CRNT, MRVL
by: Shlomi Cohen

No quarterly results by leading tech companies are expected this week, but for the chip sector the positive momentum from Friday may continue in light of the good results published last week by two leading firms - Applied Materials (Nasdaq: AMAT) and Marvell Technology Group (Nasdaq: MRVL), which has a large presence in Israel.

Applied Materials rival Novellus (Nasdaq: NVLS), as is its quarterly custom, will update its guidance (on Thursday) for the second quarter, which will end in about a month. Analysts expect an upward revision toward the top level of its recent guidance.

Marvell rose over 8% on Friday, after reporting its quarterly figures on Thursday evening. The figures showed that the company returned to what it used to do regularly in its first years as a public company, after it listed during the popping of the bubble ten years ago - it beat early expectations and raised its guidance, a feat known as "beat and raise" by traders.

The surprise in Marvell's report was not the results, which were near the upper level of its target range, but actually the very strong guidance for the quarter ending in July, guidance which contradicts the approach of several analysts who say that the chip sector is at a peak and will find it difficult to grow.

Marvell succeeded in accelerating its growth rate primarily thanks to new cellular and wireless processors. Out of quarterly revenue of $856 million, about $135 million was from newly launched processors, 35% higher than in the quarter ended in January.

Two thirds of these new processors were for 3G cellular communications, and the rest were new Wi-Fi communications processors.

Sales to the cellular and wireless sectors are expected to grow 25% in the quarter ending July, compared with the quarter ended in April. Overall sales are expected to grow 9% to $930 million, at the upper end of guidance. This is much higher than the market expected and 45% higher than the corresponding quarter of last year.

Marvell, founded and run by Sehat Sutardjia along with his wife and brother, reached fantastic financial figures in the first quarter, figures that were only dreamed about in the earlier part of last decade, days when Marvell was a momentum stock with a very high earnings multiple and a share price nearly double the current one, split adjusted.

Gross profit margin of over 60%, operating profit margin of over 31%, and 28% of sales, turned into cash of $237 million, which were added to $2.1 billion at the end of the quarter. At a current price of around $19, Marvell trades at an earnings multiple of 10 before taking into account the profit in the next fiscal year, and that is absurd considering its strong growth.

What Barclays sees

The Barclays Capital 2010 Global Communications, Media & Technology Conference this week in New York should strengthen the tone heard at a similar conference last week sponsored by JP Morgan in Boston. Two firms that I hold in my portfolio tracked by "Globes" will present at the conference. I believe the two companies - Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT) and Allot Communications Ltd. (Nasdaq:ALLT) are seeing excellent business momentum, and any drop in their share price due to market correction is a good opportunity to get into the shares.

Ceragon will focus on two interesting topics. One is the completion of a 3G frequencies tender in India. Operators there committed to spending $15 billion for the frequencies, so that they have an incentive to accelerate building the networks, and India is a giant market for Ceragon. Second is Ceragon's situation in the US, specifically with Clearwire (Nasdaq: CLWR), in view of rival DragonWave (Nasdaq: DRWI), which will also be at the conference.

Ceragon is rated "Neutral" by Barclays, with a target price of $13, significantly higher than a current price of around $8, and there is a possibility that the recommendation will be raised to "Buy" after the conference. That is, if its CFO reiterates guidance for strong growth of up to 35%.

Allot is not currently covered by Barclays, and its invitation implies that it is somehow being watched by them. As such, it may soon be covered officially by Barclays, which is significant for a small company like Allot.

I expect that Allot's deputy CFO will expand upon their success, primarily in Europe, with one of the largest cellular operators on that continent, which through today has bought or ordered systems worth about $25 million from Allot.

Disclosure: Author holds shares as part of his portfolio tracked by "Globes".

Published by Globes [online], Israel business news - - on November 17, 2009; Reprinted on Seeking Alpha with permission
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009