Since 2009, Skyworks Solutions (NASDAQ:SWKS) has outperformed major equity-market benchmarks by a wide margin. Over a period of seven years ending in mid-2015, the stock rallied from $3.5 to $113. However, after June 2015, the upward trend reversed and a price drop of approximately 50% followed in a period of a wide stock market correction. Over the same period, (adjusted) revenue rose from $0.860 billion (FY 2008) to $3.289 billion (FY 2016). Adjusted earnings per share increased almost tenfold from $0.57 to $4.93. As of Friday December 23, 2016, the stock price is at $78.03.
Figure 1. Skyworks Solutions Stock Price and Volume
Given the well-known fact that the company is heavily dependent on Apple's (NASDAQ:AAPL) commercial and financial performance, its stock returns are correlated too. It is not a coincidence that bad news related to Apple's iPhone sales take a toll on its supplier stocks. Lack of growth in iPhone sales will most likely keep downward pressure on most supplier stocks. Although there is no doubt that there is a real effect in the company's fundamentals, this dependence may or may not have already created a significant opportunity to buy the company's stock.
As we can see in Table 1 that follows, Skyworks Solutions has been the worst performer (over a period of 12 months) among some of the companies considered as rivals such as NXP Semiconductors (NASDAQ:NXPI), Analog Devices (NASDAQ:ADI), Linear Technology Corporation (NASDAQ:LLTC) and Maxim Integrated Products (NASDAQ:MXIM).
Table 1. Total Returns
Skyworks Solutions was incorporated in 2002 and it is engaged in the design, development and manufacturing of semiconductor products. The Company's semiconductors are used to connect people, places, and "things" with applications within the smartphone, tablet, automotive, connected smart-home, industrial, medical, and military markets. The company operates in various geographical segments including China, Taiwan, South Korea, Other Asia-Pacific countries, the United States, Europe, Middle East, and Africa.
Table 2. Product and Geographic Segmentation
As we can see in the figure below, the stock experienced significant selling pressure after April 2015. The result, a stock price 50% lower. The trend reversed after mid-2016 and the stock price now appears to be in a consolidation/accumulation phase (The "Buying/Selling Pressure" index is based on price changes and volume, is an index focusing on mid- to long-term horizons, and aims to capture accumulation and distribution. One can use this index by focusing on trends, regime shifts as well as "divergences", a popular approach used by followers of technical analysis to spot peaks and troughs).
Figure 2. Buying/Selling Pressure (240-day Horizon)
The recent stock price recovery is also reflected in the below analysis, which is based on the stock's highest highs and lowest lows of 20 and 60 (trading) days. Obviously, the stock is already in a "long" regime (This set of indices commonly known as Donchian Channels is used by trend followers and can provide us with an idea about how this subset of market participants may be or how will be positioned in the stock).
Figure 3. Donchian Channels, Highest Highs and Lowest Lows of 20 and 60 Days
Although previous analysis suggests that the stock is characterized by positive buying pressure and momentum, this is not evident at first glance if one considers short interest. However, if we take into consideration historical records of short interest (as a percentage of equity float), we can see that short interest is not far from the average. On the other hand, the Days-to-Cover ratio has increased lately mainly as a result of decreasing trading activity over the last months during which the stock had appeared to be in a consolidation phase.
Figure 4. Days-to-Cover Ratio and Short Interest as % of Equity Float
For comparison purposes, in the table that follows, we can see short interest data for the rivals of Skyworks Solutions considered in this article. Average short interest as a percentage of equity float for the S&P 1500 companies as of November 30, 2016, was approximately 6.1%.
Table 3. Days-to-Cover Ratio and Short Interest as % of Equity Float
The fact that the Days-to-Cover ratio is close to 7 (6.3 for the S&P 1500) suggests that, should surprisingly positive news for the stock arrive, short sellers will face some difficulties covering their positions at normal price levels.
A Growth Story
There is no doubt that Skyworks Solutions has been, up to now, an investment selection mainly based on growth metrics. As we can see in the figure below, revenue growth over the last 10 years has been, in general, higher than industry average. However, over the last quarter, growth rates have converged to industry average. In terms of profitability and cash flow generation, however, Skyworks Solutions performs better than peers.
Figure 5. Sales Growth and Capital Efficiency
As we can see in Table 4, the most significant weakness of the company lies in its ability to maintain significant growth rates. The Capital Expenditures to Sales ratio is higher than its peers' figures but not by a very wide margin.
Table 4. Sales Growth and Capital Expenditures
As it is evident from the figure that follows, Skyworks Solutions was overpriced in terms of all valuation metrics considered, a situation that peaked in the first months of 2015. It turns out that price appreciation since 2014 was mainly driven by significant multiple expansion, a situation where investors are willing to pay more for each dollar of generated sales and profits. However, the trend reversed after mid-2015 and valuation metrics have converged to industry averages. What is more, in terms of P/E, Skyworks Solutions now appears to be significantly "cheaper" than the average stock in the industry.
Figure 6. Valuation Measures
In Table 5, we report basic valuation metrics for both reported and estimated sales, earnings and cash flows. In terms of the Price to Book Value ratio, the Company is priced as the second "cheapest" after NXP Semiconductors, a company with weaker fundamentals mainly in respect of earnings. The rest of its competitors are priced higher. The same holds for price relative to sales. Based on estimated revenue, Skyworks Solutions appears "cheaper" than most other companies. The company is a clear "winner" in the earnings field where it appears to be the most attractive, both in terms of current as well as in terms of estimated earnings. The same, more or less, holds if we account for growth with its PEG ratio, which is less than one. Cash flow generation is one of the strong areas of Skyworks Solutions although the company does not invest less than the peers considered in this article.
Table 5. Valuation Measures
Overall, Skyworks Solutions appears to be attractively priced relative to industry figures both in time-series as well as in cross-section terms. There is no doubt, however, that on absolute terms, its price will heavily depend on market-wide performance over the next months.
Besides up-to-recently robust revenue growth, Skyworks Solutions' profit margins are improving, constantly reflecting improvements in the business model and overall allocation of resources and business efficiency.
Figure 7. Profitability Measures
In Table 6, we report basic profitability measures of the company against the peers considered in this article. Linear Technology Corporation appears to be the best performer in terms of profitability, with Skyworks Solutions and Analog Devices following. Still, in terms of operational expenses, Skyworks is the winner and, should the company manage to further improve the gross margin, overall profitability will take a boost.
Table 6. Profitability Measures
In terms of capital efficiency, it turns out that Skyworks Solutions beats industry norms by a significant margin.
Figure 8. Capital Efficiency Measures
More specifically, Skyworks Solutions' return on various capital measures is slightly worse than Linear Technology Corporation's performance metrics although much better than the figures of the rest of the peers considered in this article.
Table 7. Capital Efficiency Measures
Liquidity and Leverage
In terms of liquidity and leverage, we note that over the last few years, company fundamentals have improved significantly. The expansion of the company has not resulted in lower liquidity and higher leverage ratios. But as it is evident from the figure below, liquidity is much higher than the industry average and debt levels are in the zero territory.
Figure 9. Liquidity and Leverage Measures
Compared to its peers, Skyworks Solutions along with Linear Technology Corporation has both zero debt and liquidity levels higher than the rest of the peers. As of September 2016, the company's cash and equivalents were approximately $1.1 billion.
Table 8. Liquidity and Leverage Measures
Skyworks Solutions' stock price has experienced a significant recovery since February 2016 when the price was a little less than $56. At $78.03 (as of Friday December 23, 2016), almost 40% higher, investors holding the stock may wonder whether it is the right time to sell, and potential investors evaluate whether it is the right time to buy.
From a technical perspective, short-term momentum and trading activity indicate that the stock is in a positive trend regime although the stock has not recovered as much as the stock prices of its peers. On the other hand, from a fundamental standpoint, future stock price action will depend on the realization of revenue growth and earnings expectations, as well as the success of management efforts to diversify the company's sources of revenue.
As far as the current shareholders of the company are concerned, we believe that Skyworks Solutions is not overpriced. As it turns out, prices around $80 cannot be considered extreme, given how peer companies are priced in the market. As far as potential investors are concerned, previous arguments hold although one cannot exclude the possibility of a short-term correction and, as a result, the opportunity to buy the stock at even lower prices.
On relative terms, Skyworks Solutions appears to be (at least) fairly priced. In terms of (estimated) earnings, a price appreciation of 20% would not be surprising for the company's stock price to adjust to industry valuations. For portfolio managers focusing on relative performance, the company might be a good addition even at current levels which are 40% higher than February's Lows. On absolute terms, while the stock does not appear to be overpriced, one has to consider the general valuation of the stock market and the fact that a market-wide correction will most likely impact the stock anyway.
Overall, Skyworks Solutions appears to be a "Growth at a Reasonable Price" investment opportunity given the fact that valuation metrics imply the existence of some margin of safety even at relative terms. In terms of fundamentals, SWKS has the characteristics of a solid company in almost every dimension and especially profitability and capital efficiency. On the other hand, management faces the challenge to diversify the sources of income, and thus, reduce exposure to Apple and the smartphone market in general.
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