Summary
- Skyworks Solutions (NASDAQ:SWKS) is a high-quality Massachusetts-based chip manufacturer currently trading at an attractive valuation of 23x FY2016 P/E (adjusted), given its potential growth trajectory.
- The company, with its RF chip designs, will be ready to capitalize on the transition from 4Gto 5G networks. Furthermore, exposure to the fast-growing Chinese smartphone market together with launch of Apple’s new iPhones promises to deliver strong volume growth.
- Recent 3Q earnings show little signs that the company has slipped up, meaning that Skyworks is on-track to achieve its growth forecast and hence higher valuations should be justified going forward.
Quality financial metrics trading at an attractive price
Skyworks Solutions is a diversified semiconductor manufacturer with sector exposures to consumer electronics/wearables, wireless infrastructure, automotive and aerospace and defense. The chip-maker’s strong market position in Radio-Frequency (RF) chips, and in-particular the Diversity Receive Front-end (DRx) modules, enables the company to command strong operating margins of 37.8%, contributing to its strong returns on invested capital of 26.3%, as of FY2016. Management has also been prudent in managing capital, as the company sits comfortably on a net-cash position of US$1.1 billion as of FY2016, and generating a free cash flow yield of 4.7%.
According to the above table by Zacks Investment Research, Wall Street consensus put Skyworks’ forecast earnings per share in FY2017 at $5.94, which represents a 30.3% earnings growth from the current $4.56 (adjusted). Taken at face-value, such growth rates should command higher valuations than the current 23x historical P/E.
Well-placed to capitalize on the transition from 4G to 5G, mid-long term
According to a report published by Cisco in February 2017 (refer to chart above), global mobile data traffic is projected to increase 7-fold from 2016 to 2021, giving a compounded annual growth rate of 47%, driven by video content consumption. This adds impetus for fast growing economies such as China to rapidly transform their networks to 5G, which affords faster download speeds and a better consumer experience. With the implementation of 5G networks, Skyworks can look forward to a greater usage of its TC-SAW filters, boosting sales volumes in the future.
Higher smartphone sales also boost short-medium term growth prospects
As its largest customer, Apple (NASDAQ:AAPL) also has a profound impact on Skyworks’ top-line growth. Given the prevailing consumer sentiment, the launch of the new iPhone 8 and iPhone X (with new features such as facial recognition) should bring record sales,and this would allow Skyworks to receive strong volume orders from Apple.
As seen from the above table, Skyworks’ revenue exposure also tilts heavily toward China – 71% by net revenue. Huawei (SZ:002502), one of China’s largest smartphone makers which Skyworks supplies, recorded 34.2 million units sold in 1Q2017, a 18.4% rise year-on-year. Such rapid growth from China also promises to boost the chip-maker’s overall volume growth at least in the short-to-medium term.
3Q results suggest momentum isn’t slowing
In the most recent third quarter earnings release, Skyworks reported revenues of $901 million (+20% YoY) and earnings per share of $1.57 (+27% YoY). These figures beat consensus estimates by a very comfortable margin, with revenues beating estimates by $10 million and EPS beating by 5 cents. This sends clear signals that momentum isn’t slowing for Skyworks, and that the company is on-track to deliver on its YoY earnings growth rate of 30%, come the end of its fiscal year.
Given such growth prospects, current valuations of 23x FY2016 P/E (adjusted) gives a compelling entry point for a high-quality chip-maker.
Disclosure: We have no positions in any stock mentioned above.