The market has not been kind to the semiconductor over the past several months; since the beginning of September, the sector has led the broad market to the downside, with its overall decline since then at nearly 17%. That covers almost all of the sector’s almost 20% drop since March of this year, and clearly puts the sector ahead of the rest of the market, even as it pushes deeper into correction territory.
The sector has been beaten up primarily by worries over trade, as intellectual property of U.S. technology companies was brought to the forefront of the debate between the U.S. and China. That concern may not be completely resolved, but with the two countries coming back to the table and restarting their discussions over the last few weeks, there does seem to be a reason for hope, and the truth is that any actual compromise on this front is likely to be greeted with enthusiasm – not only by investors but also by the companies in the midst of the firestorm.
One of those stocks is Skyworks Solutions. Some reports earlier this year estimated that 85% of the company’s sales came from China. When you add to the mix the acknowledgement of their single biggest customer, Apple Inc. (AAPL) that demand for their latest iPhone was not as high as expected, it isn’t all that surprising that this stock has been one of the worst performers in the sector, declining almost 41% since it reached an all-time high in March. About 24% of that drop has come since September, with the sell off in the stock accelerating dramatically in mid-November when the stock dropped about $10 per share in just two days.
The stock’s poor price performance flies in the face of the fundamental numbers, because despite the pressures I just mentioned, the company’s fundamental continue to be very strong. Management has responded to questions about their dependence of AAPL by making strategic moves to diversify and their product line and innovate for the future while expanding their core customer base. The company in particular has been putting a significant amount of attention on 5G connectivity – a capital-intensive investment that most analysts don’t expect to start bearing significant fruit until early 2020, but upon which practically the entire future of wireless networking seems guaranteed to be built around. The stock’s price performance has really created a value proposition that just keeps getting more compelling every day.
Fundamental and Value Profile
Skyworks Solutions Inc. designs, develops, manufactures and markets semiconductor products, including intellectual property. The Company’s analog semiconductors are connecting people, places, and things, spanning a number of new and unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. Its geographical segments include the United States, Other Americas, China, Taiwan, South Korea, Other Asia-Pacific, Europe, Middle East and Africa. It operates throughout the world with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America. It is engaged with key original equipment manufacturers (OEM), smartphone providers and baseband reference design partners. Its product portfolio consists of various solutions, including amplifiers, attenuators, detectors, diodes, filters, front-end modules, hybrid, mixers, switches, and modulators. SWKS has a current market cap of $12.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing a little over 7.5% while sales increased about 2.4%. These numbers improved in the last quarter, with earnings jumping more than 16.5% and sales almost 13%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long term, but it is also a positive mark of management’s ability to effectively maximize the company’s business operations.
Free Cash Flow: SWKS has very healthy free cash flow of a little over than $1.0 billion over the last twelve months. It is true that this number has declined over the last two quarters, but it still remains healthy and contributes to the company’s excellent financial liquidity.
Debt to Equity: SWKS has had zero debt on its balance sheets since the beginning of 2015, which means that all of its operating profits can be used to fund research and development, expand its offerings, and bolster its cash and liquid assets. As of the last quarter, the company had more than $1 billion in cash.
Dividend: SWKS pays an annual dividend of $1.52 per share, which at its current price translates to a dividend yield of 2.21%.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SWKS is $22.89 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.0. The historical average for SWKS is 4.18, which means that SWKS is significantly under-valued – by about 39% – at current price levels. The stock’s Price/Cash Flow ratio offers a very similar perspective since it is current trading more than 41% below its historical average. Those numbers but the stock’s long-term target price between $95 and $97 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above is a good representation of the stock’s decline over the past nine months. Recently the stock does appear to have found support at around $65 per share, but given the length of the downward trend, and its accelerating momentum since November, that support could be tentative at best. A break below $65 could easily see the stock drop more than 10% before finding new support at around $57 per share. SWKS would have to rally significantly to reverse the downward trend, with a minimum push to about $82 (to fill the 2-day drop that occurred in early November) needed just to create enough momentum to push the stock above $89, which is where I would mark a signal point for an actual bullish trend reversal.
Near-term Keys: If the stock breaks below $65 as just mentioned, there could be an interesting opportunity to short the stock or buy put options to play the roughly $7 per share distance to the stock’s next support level. A short-term bullish play is hard to justify given the strength of the downward trend; however if the stock can hold its current support level and begin to establish a consolidation range, it is certainly at a point now where the value proposition is already very appealing. Even if the stock does break down further, a smart value investor should just treat that as a good opportunity to buy a great at an even nicer price.