Safe 14% Upside For Marvell, Texas Instruments

Includes: MRVL, TXN
by: Takeover Analyst

Since I argued that Marvell (NASDAQ:MRVL) was undervalued here, the stock appreciated by 12.2%. The semiconductor firm continues to be rated a "buy," and still has meaningful room for upside. Texas Instruments (NYSE:TXN) has similar upside by my calculations, but is rated a "hold" on the Street.

From a multiples perspective, Marvell is the cheaper of the two. It trades at 13.6x past and forward earnings, while Texas Instruments trades at a respective 17.7x and 13.5x past and forward earnings. Marvell also has a free cash flow yield that is higher, at 9%. Extrapolating based off of these figures without getting aggressive over multiples expansion, I find that the upside is safe for both firms.

At the third quarter earnings call, Marvell's CEO, Sehat Sutardja, noted a commitment to returning free cash flow to shareholders:

Today, we reported third quarter revenues of approximately $950 million reflecting a 6% sequential increase from the prior quarter driven by our mobile and wireless end market. We delivered the following non-GAAP results: gross margin of 56.8%; operating margin of 25%; and earnings per share of $0.40. We generated free cash flow of approximately $239 million, equivalent to a 25% free cash flow margin. In addition and consistent with our plan to return value to our shareholders, we continue to repurchase our shares. In Q3, we repurchased about 50 million shares for a total of approximately $215 million.

Improving demand for TD-SCDMA smartphones and a shift of SSD controllers towards merchant solutions will be particularly beneficial for Marvell, as opposed to its competitors, due to its first mover advantage. The HDD business is also well positioned to recover and generate high risk-adjusted returns in the process. The adoption of 500G represents yet another major catalyst. In light of these strong opportunities and high free cash flow yield, it is encouraging how management is committed to buyback activity.

Consensus estimates for Marvell's EPS forecast that it will decline by 24.4% to $1.24 in 2012, decline by 5.6% in 2013, and then grow by 28.2% in 2014. Assuming a multiple of 16x and a conservative 2013 EPS of $1.14, the rough intrinsic value of the stock is $18.24, implying 13.6% upside.

Texas Instruments is trending towards meaningful gains in margins and market share. Its improvement in staff and capacity well positions the firm for penetration in analog, microcontrollers, and the realization of its 55% gross margin target. And on the macro side, it is possible that the industry is at a trough due to the fact that inventory conditions are similar to what we have seen during previous troughs. In any event, the integration of National Semiconductors is looking strong and will generate $100M worth of cost synergies this year alone.

Consensus estimates for Texas Instrument's EPS forecast that it will decline by 15.8% to $1.86 in 2012 and then grow by 32.8% and 21.5% in the following two years. Modeling a CAGR of 10.7% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $38.19, implying 14.5% upside.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in (TXN) over the next 72 hours.