Skyworks: A Well-Diversified Analog Device Maker with Tremendous Growth Driven by the Internet of Things

Skyworks Solutions (SWKS) of Woburn, Massachusetts, is one of the world’s largest suppliers of high-performance analog semiconductor solutions that are used in products such as amplifiers, attenuators, diodes, modulators/demodulators, opto-couplers, synthesizers, switches, technical ceramics and power management devices.

Skyworks recently reported quarterly revenue gains of 13% and EPS gains of 29% that beat estimates, and management raised Q3 forward guidance based on revenue visibility and sales pipeline. The company exceeded all key guidance metrics in the quarter and will outpace the broader semiconductor industry in the years ahead as it focuses on increasingly complex, customized analog solutions driven by the Internet of Things (tech-speak for a more device-interconnected world) and new, previously unimagined end markets.

In response, Skyworks shares were up 8% on the news and six Wall Street banks raised their target prices closer to the $50 range, offering at least 15% to 20% near-term upside over current share price levels.

Skyworks benefited significantly from robust sales to Apple’s iPhone and other smartphones from industry leaders such as Samsung and Chinese OEM handset makers. In addition, revenue gains were driven by increasing traction in the higher-value non-handset analog business and in wireless infrastructure. Skyworks has smartly positioned itself away from over-reliance on the smartphone market and on the Internet of Things which focuses on smart connected devices that is a huge growth market looking ahead.

As a result, Skyworks is growing revenues more rapidly than its key end customers. Skyworks also offers better growth, diversification and safety relative to investments in dedicated brands such as Apple.

Skyworks serves a wide swathe of industries such as mobile (smartphones, handsets and tablets), wireless connectivity and infrastructure, aerospace and defense, automotive, cable tv and satellite communications, smart energy, medical, RFID and test and measurement.

Its global
customer list features major names such as Apple, Cisco, Ericsson, Fujitsu, General Electric, Google, Honeywell, LG Electronics, Nokia, Northrup Grumman and Samsung, where Skyworks supplies modules that go into branded equipment.

Skyworks Shares Up 393% Over 10 Years (17% Annually)

At $41.46 (as of April 25, 2014), Skyworks shares trade near their all-time high of $42.29 with a trailing 12-months price-to-equity ratio of 25.2x and a market capitalization of $7.8 billion with 72% institutional ownership of publicly traded shares. Shares trade at 4.2x TTM sales, 3.5x book value and 24x cash flow, and reflect strong growth prospects.

Skyworks shares have delivered a total return of 393% over the past 10 years, well above the S&P 500 Index performance, and over 17% annually.

Skyworks has zero debt, generates strong cash flow and is financially very stable.


Dividend Initiated – March 2014 ($0.11 quarterly per share, 1% yield)

In March 2014, Skyworks initiated a dividend payment policy with the first quarterly dividend of $0.11 per share payable May 22 to shareholders of record at the close of business on May 13, 2014.

The decision to pay dividends (in addition to the company’s ongoing stock repurchase program) reflects confidence in the company’s business and cash flow growth prospects, and delivers cash to shareholders. At $0.44 annualized, shares will provide a dividend yield of just over 1.0%.

Company Ranks Very Highly Relative to Peers

Skyworks is currently among an exclusive group of 177 stocks awarded the highest score (10) by Thomson Reuters, with 7 Wall Street analysts rating the company a Strong Buy and 9 rating it a Buy.


Relative to peers, Skyworks has the highest ranking (Thomson Reuters average score), the second-highest 1-year return (99.5%), forward PE of 13.4 that is below its peer average of 16 and the second-highest profit margin. Skyworks days-sales of inventory have been lower while its net profit margin has been higher than the industry average for each of the past five years.

Shares have an average 12-month price target of $45.60 (vs. $41.46 as of April 25) with a high target of $50 and a low target of $31.

 


 

Shares have delivered solid returns on strong growth in revenue and earnings, and still trade at near-average long-term PE (13.4) and PEG (PE/Growth of 0.8) valuation ratios, and are well below equivalent valuation measures for the semiconductor industry.


(Source: Thomson Reuters)

Winning Strategy and Competitive Advantages

Skyworks strategic vision focused on higher value customized solutions, new growth opportunities with above-market growth in diversified analog devices and laser focus on operational execution that delivers superior financial results.

Skyworks competitive wins are underlined by their exceptional expertise in analog systems and devices, an intense focus on meeting customer needs to the last performance detail, and leveraging an extensive global R&D and manufacturing organization that provides the highest quality and reliability at the lowest cost… which in turn leads to multi-year bulk contracts with quality conscious customers such as Apple.


Through this strategy, Skyworks has consistently delivered earnings growth in excess of 20%
annually over the past five years, with strong quarter on quarter results and increases in gross margin and operating margin.

Strong Underlying Market Forces Driving Growth

Skyworks has powerful underlying market forces that are driving growth. These include global demand for high bandwidth and high performance services, devices that need to incorporate more networking standards that increases complexity and addressable market opportunities and connectivity entering new vertical markets and new product categories which create new addressable markets for Skyworks.

For example, while demand for wifi-enabled units is expected to grow at a 20% CAGR, products that incorporate the high bandwidth 802.11ac networking standard are expected to grow at a 400% CAGR, and this market is only still in its early stages… and is a strong driver behind Skyworks revenue growth.


And as home networking, smart homes, smart cars, etc., finally start to become a reality, demand for Skyworks customized analog semiconductor solutions has gotten a significant boost. Analysts estimate there will be 70 billion smart devices deployed by 2020, of which Skyworks is well positioned to claim its fair share.



Skyworks has also smartly positioned itself in higher-margin high-performance analog solutions which increasingly deliver a higher percentage of Skyworks revenues, and reflect management savvy in anticipating and delivering on growth opportunities.


Experienced Management Has Solidly Positioned the Company for Growth

David J. Aldrich serves as President and CEO, a position he assumed in June 2002 when Skyworks was formed from the merger of Alpha Industries (where Aldrich served as CEO) and Conexant Systems’ wireless business. Aldrich is an experienced industry veteran who has been instrumental in delivering outsize shareholder gains over the past 10 years. His management style incorporates keen strategic insights with a focus on diversification and growth in a fiscally responsible manner.

Donald W. Palette serves as CFO, and has been with the company since August 2007. Palette has extensive finance experience in the technology manufacturing sector, and believes in fiscally responsible growth.

Additionally, the management team includes highly experienced technology, sales and marketing executives who work well as a team towards a common vision for growth, profitability, cash flow generation and shareholder returns, in a very competitive sector.

Q2 2014 Results – Revenue Up 13%, EPS Up 29%

For its second quarter ended March 28, 2014, Skyworks reported revenues of $481 million, up 13% over Q2 2013 and well above the company’s earlier guidance of $470 million.

Quarterly highlights include: devices for NetGear‘s newest 802.11ac MU-MIMO routers and residential gateways; equipment to support car-maker Audi‘s Homelink programmable car system; key aerospace and defense deals with EADS, Cobham, Herley and Teledyne; power management design wins with Samsung; home security solutions (sensors, motion detectors, lighting controls and meters) at Centralite and Landis+Gyr; wireless applications for Alcatel-Lucent, Ericsson, Nokia and ZTE; analog devices for Medtronics implantable heart monitors; and analog and connectivity solutions for Microsoft, Nintendo and Sony gaming platforms.

On a non-GAAP basis, excluding one-time charges, operating income was up 31% to $130.4 million while non-GAAP diluted earnings per share were $0.62, three cents above guidance and 29% above the year-ago quarter. GAAP operating income was $102.6 million with diluted earnings per share of $0.40.

In the quarter, Skyworks generated $214 million in cash from operations and ended the quarter with a cash balance of $798 million, zero debt and book value of $2.29 billion, up 9% over the last two quarters.

Robust Q3 Outlook

Looking into Q3 2014, Skyworks expects strong and sustainable top-line growth with continued operating leverage, with revenues of about $535 million (up 23% year-over-year) and non-GAAP diluted earnings per share of $0.73, up 35% year-over-year.

Summary

Skyworks has consistently performed well above its industry peers over the past five years, and has delivered handsome shareholder returns. Management operates a debt-free company with double-digit, industry-beating profit margins, and has successfully positioned the company to capitalize on growth trends over the past decade. By initiating quarterly dividends, management has also shown a willingness to stay away from hoarding cash and enhancing shareholder returns. Looking ahead, Skyworks is solidly positioned to capitalize on new, high-margin market opportunities and deliver strong shareholder returns through continued operational and fiscal discipline.

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