Marvell Technology Group (MRVL) offers mobile products including communications processors, applications processors (based on ARM), devices which incorporate wireless, bluetooth, and FM radio capability, and controllers for hard disk and solid-state drives. Looking at the financials, MRVL seems undervalued compared to the rest of the technology companies.
At the time of writing this article, Marvell had a market capitalization of $7.84 billion, cash and short term investments equalled $2.4 billion, and with zero debt, its enterprise value (market capitalization - cash + debt) amounted to $5.44 billion. To see why Marvell is undervalued we will look at three financial metrics: price to book ratio, enterprise value to free cash flow ratio, and enterprise value to earnings ratio.
Price to Book Ratio (P/B)
Price to book ratio indicates the premium at which the company's stock is trading in comparison to its liquidation value. A number close to 1 is always preferred, with 1 meaning that the company is trading at no premium. Marvell's P/B ratio is 1.53, and as indicated in Table 1, it is the lowest in comparison to other technology companies such as Qualcomm (QCOM), Broadcom (BRCM), and Texas Instruments (TXN).
Enterprise Value to Free Cash Flow Ratio (EV/FCF)
This number indicates the time (in years) it will take the company to generate enough cash, such that its stock is trading at its cash value. During the last 12 months, Marvell generated more than $900 million in free cash flow. The second quarter of fiscal 2012 (ending July 30, 2011) represented the 16 consecutive quarter of positive free cash flow for the company. If Marvell continues to generate the cash at this pace, its stock will be trading at its cash value in close to 6 years. Again, Marvell has the lowest number among all the companies listed in Table 1.
Enterprise Value to Earnings Ratio (EV/E)
Price to Earnings ratio (P/E) is well understood by most investors. The lower the P/E ratio, the cheaper its company's valuation. However, a better number is enterprise value to earnings ratio, which basically subtracts the cash per share from the stock's price, adds any debt, and then divides this number with the earnings per share. As we see from Table 1, Marvell has a significantly lower number.
Table 1: Financial Metrics of Technology Companies
P/B EV/FCF* EV/E** MRVL 1.53 6.04 5.51 BRCM 2.98 10.32 9.77 TXN 2.68 10.51 8.89 QCOM 3.0 17.29 10.67
**Earnings used is fye Dec 2011/Jan 2012
Additionally, it seems the company itself believes it is undervalued. This is evident, as Marvell in the past few quarters has spent around $1 billion, repurchasing over 64 million, or nearly 10 percent of its outstanding shares; the average repurchase price being $15.6 per share. Recently, its Board of Directors has authorized another $500 million under its share repurchase program.
Based on the above financial analysis, I believe Marvell is trading below its true intrinsic value, and is a strong buy at current valuation.
Note: At the time of writing this article MRVL was trading at $12.89