As has been a pretty consistent theme for most of the past year, uncertainty around trade continues to put the market on edge. Beginning last month, investors started feeling trade anxiety all over again as trade progress seemed to stall yet again. At the beginning of this week, hope shifted back yet again after the Trump administration it would delay penalties on U.S. companies doing business with Chinese tech giant Huawei until the end of the year.
Huawei, and the actions of the U.S. government around that company, seems to be an interesting barometer for trade progress, simply because it has important business relationships with a large number of U.S. companies – especially in the Semiconductor industry. In the latest round of earnings reports, a number of CEO’s cited the ban on Huawei as a negative draw on their earnings results, and included discussions about their strategies to mitigate that risk moving forward. So it isn’t all that surprising that any kind of shift in attitude by the U.S. government towards Huawei would be taken as a positive for the entire Tech sector.
Skyworks Solutions Inc. (SWKS) is one of the companies whose relationship with Huawei is a significant part of their business. Management disclosed in its latest earnings report that since Huawei represented 12% of their sales, the ban has had a measurably negative impact on their results. Even before the ban was put in place, the company was working to expand its customer base, and has projected growth of 20% in the next quarter with customers outside of Huawei. It also occupies a critical and encouraging position in the 5G space, since its solutions address base stations, small cells, as well as BAW-enabled devices. These are all elements of 5G infrastructure and the transition to the WiFi 6 standard that should help to drive growth even more in the months and quarters ahead. Since the beginning of the month, the stock has dropped almost -14% from a short-term peak at almost $89 per share. SWKS’ fundamental measurements are solid, despite showing clear impact signs from industry concerns related to trade as well as broad issues that have plagued the entire semiconductor industry over the past year, including persistent indications the industry had created a significant level of oversupply of memory components that has just begun to recede.
Is this a good time to think about SWKS as a long-term value or growth opportunity? Perhaps; it isn’t a given, of course that issues around trade won’t come charging back to the fore before the end of the year. Even so, there is a lot to like about SWKS from a fundamental standpoint, with a bargain story that I think looks pretty interesting at the stock’s current price level.
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 $13.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings and sales both decreased, with earnings declining -19.2% while sales dropped a little over -14%. These numbers improved in the last quarter, but were still negative, with earnings dropping a little more than -6.5% and sales about -5.3%. Despite the bearish earnings pattern, the company operates with an impressive margin profile, with Net Income running at 26% of Revenues over the last twelve months; this number also declined in the last quarter, but remains very healthy at 18.7%.
Free Cash Flow: SWKS has healthy and improving free cash flow of about $731.7 million over the last twelve months. This number has improved from the quarter prior when it was $670 million, and equates to a Free Cash Flow Yield of 5.5%.
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 $935 million in cash.
Dividend: SWKS pays an annual dividend of $1.76 per share, which at its current price translates to a dividend yield of about 2.3%.
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 $23.74 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.23. The historical average for SWKS is 4.22, which means that SWKS is significantly undervalued – by about 30.5% – at current price levels. The stock’s Price/Cash Flow ratio offers an even more optimistic perspective since it is current trading more than 49% below its historical average. Those numbers but the stock’s long-term target price between $100 and $114 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 movement over the past two years. The downward trend that ended in late December 2018 is marked by the red diagonal line, and provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock had seen a nice rally from late May to the beginning of August, rising from about $68 to a peak at the 50% retracement line at almost $89 before dropping back again. The stock’s closest support right now is about $6 away from the stock’s current price, at the 38.2% retracement line and about $82 per share. The stock also appears to be holding near support right now in the $75 to $76 price area. A drop below $75 could see the stock drop back to its next support level, which appears to be somewhere between $68 and $69 based on the most recent pivot low in late May.
Near-term Keys: The stock’s current basing pattern has had very near-term peaks around $78 per share, which means that a break above $78 could mark a useful signal to consider buying the stock or working with call options on a short-term basis with a near-term target price at around $82. If the stock breaks below $75, however, I would use that as an opportunity to think about shorting the stock or working with put options with an eye on the stock’s last pivot low at around $69 per share. If you are looking for a good value opportunity, and aren’t afraid of seeing additional volatility in the near term, SWKS is offering an impressive bargain right now. I also think companies in the 5G space are likely to represent some of the best growth opportunities moving into 2020 and beyond, and SWKS occupies what a lot of analysts consider a “sweet spot” in the ongoing infrastructure build out of this next-generation phase of the telecommunication industry.