One of the challenges of everyday investing, and trying to stay abreast of current events and major news is that sometimes you can start to get lost in the noise of right now. By that, I mean that most good investment decisions are made with an eye on what your end goals are, and where you want to be at some point down the road. The time frame involved might be long term or near term, but in just about every case, any investing decision comes down to your expectation for what will happen in the future. I think that’s true whether you’re looking at a swing based trade that might only last a few days, a long-term investment that could extend for years at a time, or even deciding where to park your money for the time being while you decide what your next steps are.
The global COVID-19 pandemic is a good example to me of how easy it can be to let what is going on right overwhelm objective, rational, and goal-oriented investing decisions. This morning I listened to an interview with the CEO of a major telecommunications company. In this company’s recent earnings call, the CEO talked at length about capital investments it was continuing to make to complete the build out of its 5G platform and services. The interview I listened to started by focusing, not surprisingly on the effect COVID-19 was having on its business and how it was surviving, but then the interviewer starting asking about its capital expenditures, and how it could keep spending so much money under such uncertain conditions. The CEO’s answer was straightforward, pragmatic, and emphasized the point I think we all have to keep in mind: the pandemic is serious, but it will also pass, and so will the recessionary conditions that it has created. No matter whether that happens soon or late, this CEO understood that his company needs to be able to not only continue supporting its customers right now, but also be ready to ramp up its products and services quickly when that recovery inevitably happens.
As investors, we have to pay attention to what is going on right now, but we also have to be able to keep an eye on the road ahead and think about how we are going to be in the right position when opportunity arises. That means not only looking for good investments right now, but also thinking about potential opportunities that could arise in the future. When the economy does start to recover, what are the stocks you want to have your radar, and where do you think the right prices are for those stocks to justify actually making an investment? That’s a big part of the reason I like to keep a pretty large watchlist of stocks on hand at all time – I review them on a regular basis and try to have an idea in each case for where I think the best prices for them are.
Xilinx Inc. (XLNX) is a semiconductor company that I think occupies an interesting niche in its industry. (XLNX) doesn’t manufacture its own products, instead relying on relationships with companies across the world, including China and other parts of the Asia-Pacific region to deliver its goods to customers all over the globe. Exposure to that part of the world is a big reason the stock really suffered from July of 2019 until March of this year. Most of that initial pressure came from tariff and trade concerns between the U.S. and China. The completion of phase one of a trade deal late in 2019 gave the stock some life, and it rallied a bit until January before dropping from about $103 per share to a March low at around $67.50. I think a lot of that initial drop, which came before COVID-19 fears really found their way onto North American shores was tied to the virus’ initial spread and the broad economic shutdown that started in China and throughout the Asia-Pacific region, and has since extended across the globe. Much of the rally since then can be tied to the market’s rally, which can be tied to hopes that the U.S. economy can restart sooner than later, and the virus will be brought under control. That begs the question – not necessarily of whether XLNX is a good investment right now, but where is the right price to take a company in a very economically sensitive industry seriously as a long-term, value-based investment? Let’s find out.
Fundamental and Value Profile
Xilinx, Inc. (Xilinx) is engaged in designing and developing programmable devices and associated technologies. The Company’s programmable devices and associated technologies include integrated circuits (ICs) in the form of programmable logic devices (PLDs), including programmable System on Chips (SoCs) and three-dimensional ICs (3D ICs); software design tools to program the PLDs; targeted reference designs; printed circuit boards, and intellectual property (IP), which consists of Xilinx, and various third-party verification and IP cores. The Company provides design services, customer training, field engineering and technical support. Its PLDs include field programmable gate arrays (FPGAs), complex programmable logic devices (CPLDs) that its customers program to perform desired logic functions, and programmable SoCs, which combine (Advanced reduced instruction set computing (RISC) Machines (ARM)) processor-based systems with programmable logic in a single device. XLNX has a current market cap of $21.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -17%, while sales dropped -8.72%. In the last quarter, earnings improved 14.71% while Revenues also rose 4.52%. XLNX’s Net Income versus Revenue is robust; over the last year this number was 25%. It did drop in the last quarter, but remains healthy at 21.43%.
Free Cash Flow: XLNX’s Free Cash Flow is healthy, but modest at a little more than $1 billion. That translates to a mostly unremarkable, but adequate Free Cash Flow Yield of 4.65%.
Debt to Equity: XLNX has a debt/equity ratio of .47, which is a good reflection of the company’s conservative approach to leverage. Their balance sheet shows a little more than $2.4 billion in cash and liquid assets against just $747 million in long-term debt. When you combine this element with their strong Net Income, I think it becomes easier to see that XLNX is in a good position to weather any storm that comes its way.
Dividend: XLNX pays an annual dividend of $1.52 per share, which at its current price translates to a dividend yield of about 1.74%. That is modest, but it is also less than 50% of the stock’s earnings per share over the last twelve months – a conservative payout ratio that actually helps bolster the company’s balance sheet strength.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $76.73 per share. That means that BAX is overvalued, with about -12% downside from its current price. It also puts a bargain price for the stock at around $61.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line defines the stock’s downward trend from July of last year, to its low point in March at around $67.50. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock has started a solid short-term upward trend from that point, and is currently pulling back from resistance at around $92 offered by the 38.2% Fibonacci retracement line. Immediate support should be around $83 based on pivot activity in February and March. A push above the 38.2% retracement line, to about $93 would mark solid confirmation of the stock’s upward trend and should offer upside to just about the $100 mark, where the 50% retracement line sits. If the stock drop below support at $83, it could fall to its next support at around $77.50 per share.
Near-term Keys: The stock’s fundamentals are strong, but the truth is that with the stock’s fair value below its current price, XLNX can’t be called a bargain right now. If the market yields to some of the economic readings that are indicative of a globally recessive economy, it could approach its bargain price around $61, and would offer a better value opportunity at that point. That said, the stock’s current upward trend is encouraging, and could offer a couple of different interesting opportunities if you prefer to work with shorter-term strategies. A rally to $93 could be a good signal to buy the stock or work with call options, using $100 as a useful target profit point. If bearish pressures come to bear and push the stock below $83, consider shorting the stock or working with put options, with $77.50 providing a very attractive exit point on a bearish trade.