Salute Your Shorts – NASDAQ:SWKS

Skyworks Logo

Recent Price: $25.93
Target Price: $31.57
Potential Gain: 22%
Market Cap: $4.48B
CEO: David Aldrich (2001-Present)

Skyworks Solutions (NASDAQ:SWKS) is a differentiated, low-cost provider of analog radio-frequency semiconductors. The company sells its products primarily through a direct sales force, as well as through independent manufacturers’ representatives and distribution partners. SWKS manufactures 80% of its wafers and does 90% of its assembly and testing in-house.

Products include amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, phase locked loops/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches, and technical ceramics. The company also offers MIS silicon chip capacitors and transceivers.

Internet-of-Things-1

The global population is still under-connected. Traffic from wireless and mobile devices will exceed traffic from wired devices by 2017. SWKS is uniquely positioned to capitalize on this trend. Product segmentation has moved from an 80/20 to a 60/40 mix of mobile / non-mobile revenues. Management sees a 50/50 mix in the near term. This runs contrary to the theme of many semiconductor producers, who, if anything, have become more closely tied to the big handset manufacturers.

Product Potential

Customers include Cisco, Boston Scientific, GE, Harman, Lenovo, Foxconn, ZTE, Samsung, Google, and Huawei.

SWKS has products which address the mobile-to-mobile, medical, automotive, networking, SmartEnergy, Infrastructure, and mobile devices.

The company also owns a portfolio of approximately 1,000 patents.

Expanding FootprintIf you own an Iphone 4 or 5, or a Samsung Galaxy, you have already bought this company’s products.

Key restrictions in the mobile space revolve around two things:

  1. Power – That little device in your pocket has to be able to reach a cell tower 10-30 miles away. SWKS started out in power amplifiers, and that skill-set has a very direct technical relation to number 2.
  2. Spectrum – Different providers use different radio-wave frequency ranges.  Furthermore, different countries regulate their RF spaces as well. More information can be found here: http://en.wikipedia.org/wiki/Frequency_allocation . Transmitting on a specific frequency requires minute changes in power amplification.

What about the competition?

Comps

It is worth noting that Skyworks has lower employee turnover than the industry average. Glassdoor.com ratings by employees are also very positive. In the tech industry, your most important assets are people. These trends bode well for Skyworks, and are reflected by revenue/employee.

Gross Margin Comparison

SWKS has expanded its gross margin at a time when the semiconductor industry, and the company’s main competition, experienced a downturn. Management has been guiding margins up!

The secret sauce here is the manufacturing process and the deep relationships with clients. Skyworks is rolling out products which are manufactured as one total package. This reduces manufacturing costs, and limits opportunities for OEMs to plug and play with competitors. In addition, they have been able to consistently improve chips per wafer.

The semiconductor industry is notoriously cyclical. SWKS manages these risks with a hybrid model. They manufacture in-house in segments where they feel they have a competitive advantage, and partner up with others when they do not. Vertical market discipline is something management talks about quite a bit in their earnings calls.

Shorts

We should all be thanking the shorts for keeping a lid on the stock. Having painted Skyworks with a broad, industry-wide brush, they have realized their mistake and are now hitting the eject button. Current short interest is around 3%.

DCF Assumptions

I settled on a WACC of 12%, based upon comparisons to competitors, and to company information on cost-of-capital available on the website. No debt certainly made the calculations easier.

WACC and Terminal

The bear case assumes a more tepid sales growth rate than average Wall Street estimates.

The base case is pretty much in line with Wall Street estimates.

The bull case assumes management can grow margins to 30%, which is their stated goal, as well as strong revenue growth as the internet of things picks up speed.

Platform Agnostic – Samsung, Apple, HTC who cares? Any way you slice it Skyworks wins and is pushing out into growing wireless device markets

Tax Advantaged Dividends (Buybacks) – $250M share buybacks announced recently, represents about 5.6% of the common stock

China – movement from 2G to 3G networks is still ongoing. 3G is only ~30% of market in China

Internet of Things – Growing demand for wireless devices of all flavors (NEST home devices, keyless FOB, GPS guidance, UAVs, etc)

Mr. Market is forecasting the typical semiconductor woes on a superior management team, with a superior business model, yielding ROIC well above the cost of capital (5-10% above cost FY10-FY13)

I have put 2% of my portfolio into this company, and may buy more as opportunities present themselves.

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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