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Summary

  • SWKS has the highest combined Equities Lab Buzz, Income Statement, Balance Sheet, Value, and Cash Flow Score in its entire industry.
  • The stock appears undervalued by at least 20% based on its forward P/E, price to free cash flow, and price to cash flow.
  • The numerous fundamental green flags make SWKS a solid long-term buy.

Skyworks Solutions Inc. (NASDAQ:SWKS) offers products that are used in a very diverse range of markets including smartphones and tablets, Wifi connectivity, wireless infrastructure, aerospace and defense, automotive, and medical. Its products include amplifiers, diodes, filters, mixers, modulators, switches, and more. A detailed list can be found on the company website. The quality and diverse range of products offered has enabled the company to acquire big name customers such as Cisco (NASDAQ:CSCO), Ericsson (NASDAQ:ERIC), Foxconn (OTC:FXCOF), General Electric (NYSE:GE), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), LG Electronics (OTC:LGEAF), Netgear (NASDAQ:NTGR), Nokia (NYSE:NOK), and Samsung (OTC:SSNLF).

We are bullish on this stock for multiple reasons that focus mainly on the company's fundamentals and how those fundamentals stack up to their industry. The reasons can be viewed below:

  1. The Equities Lab Balance Sheet + Buzz + Income Statement + Value + Cash Flow Scores equal 38, which is the highest out of 157 companies (must have a market cap greater than $100 million) in its industry.
  2. There have recently been large upwards revisions to the company's EPS estimates, indicating the street is becoming more bullish on the stock.
  3. SWKS just started paying a dividend, which has a lot of room to grow.
  4. The stock is highly undervalued based on its price to free cash flow per share and price to cash flow per share.
  5. The company has no long-term debt, great margins, and other fundamental green flags.
  6. The stock's P/E and forward P/E indicate it is trading at a bargain.

In Equities Lab, we have developed scores that touch on each areas of a company fundamentals. The Balance Sheet, Income Statement, Value, Cash Flow, and Buzz Score each measure a different aspect of the company's well being and are all out of 10. We developed these scores using back testing to ensure that stocks with higher scores outperformed stocks with lower scores on average. The screenshots and text below will explain each score.

SWKS stands out regarding these scores because it currently has the highest combined score out of 157 companies (must have a market cap greater than $100 million) in the semiconductors industry.

Buzz Score

SWKS has an Equities Lab Buzz Score of 7 out of 10. The stock is awarded 1 point for each of the conditions it meets. Below is a screenshot of the conditions in the Buzz Score (If you have any questions regarding what these conditions are saying, please leave a comment):

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The score is essentially a measure of bullish activity surrounding a stock. According to our backtest, shown below, stocks with high buzz scores (represented by the line in green) outperform stocks with low buzz scores (represented by the line in turquoise) on average. An in-depth page describing our backtest can be found here:

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Income Statement Score

SWKS has an Equities Lab Income Statement Score of 9 out of 10. The score measures the health of a company's income statement. High scores indicate the company has a healthy and improving income statement. The backtest of companies with high Income Statement score versus companies with low Income Statement Scores looks much like the Buzz Score back test graph you see above. Below is a screenshot of the conditions in the Income Statement Score:

Value Score

High Value scores indicate the stock may be underpriced. SWKS has Value Score of 5 out of 10.

Cash Flow Score

SWKS currently has an Equities Lab Cash Flow Score of 8 out of 10. Below is a screenshot of the conditions in the Cash Flow Score:

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According to our backtest, shown below, stock's with high Cash Flow scores (represented by the line in green) outperform stocks with low Cash Flow Scores (represented by the line in turquoise). The significant difference in performance makes us confident that the Cash Flow score is a great indicator.

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Balance Sheet Score

SWKS has a Balance Sheet Score of 9 out of 10. Below is a screenshot of the conditions in the Balance Sheet Score:

Estimates and Revisions

According to our data from AAII, analysts have aggressively revised their EPS estimates upwards over the past month. The estimate for 2014 is now 8% greater than it was one month ago, and the estimate for 2015 is 10% greater than it was 1 month ago. EPS in 2013 was 1.48, so analysts are expecting margins and sales to improve significantly in 2014.

Dividends

In March of 2014, according to this press release, SWKS announced the paying of a quarterly dividend of $.11. The dividend of $.44/year currently represents a 1% yield, and that has a lot of room to grow. The estimated EPS for 2014 is $2.8, so the $.44 in dividend payments represents only a 15.7% payout ratio. Look for SWKS to announce numerous dividend increases over the next couple of years.

Valuation Ratios

SWKS currently has a P/E ratio of 25.35 and a one year forward P/E of 15.2. The average one year forward P/E of semiconductor stocks with a market cap greater than $1 billion and a forward P/E less than 75 is 19.3. The average of 19.3 is 27% greater than SWKS' forward PE of 15.2, indicating SWKS may be undervalued.

SWKS currently has a Price to FCF per share of 20 and a Price to Cash Flow Per Share of 29.4. The average price to FCF per share in the semiconductors industry with market cap greater than $500 million is 71% greater at 34.1. The average price to cash flow per share in the semiconductors industry with a market cap greater than $500 million is 66% greater at 48.9. SWKS is able to generate cash flow and free cash flow significantly better than similar companies in its industry and may be undervalued because of it.

Given that SWKS is expected to grow at an above average rate over the next 5 years, we believe that the large disparity between the stock's price to cash flow, price to free cash flow, and P/E versus its industry average makes for a great buying opportunity.

Fundamental Green Flags

- SWKS has a quick ratio of 5.8, which ranks in the top 16% of its industry.

- SWKS has a liabilities per assets of .1, which ranks in the top 10% of its industry.

- No long-term debt.

- SWKS has an trailing 12 month net margin of 16.9%, which ranks in the top 13% of its industry. The table below displays how its trailing 12 month gross margin and net margins have been slowly improving over time.

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- Shares outstanding have decreased over the past 12 months from 191 million to 188 million.

- Three year annualized sales growth of 18.7% ranks well above the industry average. The graph below displays the most recent reported quarterly sales over time. As you can see, sales have been on a consistent and aggressive incline since 2010.

(click to enlarge)

Summary

In all, Skyworks Solutions Inc. offers value, growth, and great fundamentals. Some things that stand out about it are the fact that it has the highest combined Equities Lab buzz, income statement, value, cash flow, and balance sheet score out of all stocks in its industry. In addition, the stock may be undervalued by at least 20%, according to its forward P/E, price to cash flow, and price to free cash flow compared it its industry average. The company also has numerous other fundamental green flags. We recommend SWKS as a long-term buy, per the points discussed in this article.

Source: Skyworks Solutions' Fundamentals Make It A Concrete Buy