Strong 1Q & Mid-Term Guidance
Skyworks Solutions (SWKS) posted another strong quarter (4Q15) and issued strong guidance Thursday Nov 5 after the close. Skyworks guided for mid-teens revenue growth over the mid-term (6 - 8 quarters). Skyworks guided for gross margin of 51% in Q1 and gross margin expansion to 53% over the mid-term. If you plug all this guidance into their business model, the stock is valued at only 12x forward earnings and 15x forward FCF.
Management Consistently Delivers on Guidance
Skyworks management has delivered on their guidance quarter after quarter. This consistency is in stark contrast to the uneven performance of the semiconductor industry and broader macro economy. One would think this type of consistent outperformance would command a higher multiple to earnings. This is not the case for Skyworks which is trading at one of the cheapest valuations in the industry, well below the industry average of 18x.
I did a little comparison of a handful of semiconductor stocks. Skyworks has a below average valuation even though their growth rate is above average. Comparing the stocks on a PEG ratio basis again shows Skyworks is one of the best values per unit of growth.
Skyworks' multiple could expand 50% and only reach the semiconductor average valuation. This opens the door to $120 upside to the stock over the next year.
Skywork's generated 59% of revenue in mobile. This concentration in mobile is a potential downside if the smartphone and mobile industry slowdown faster than expected. Also, Skyworks probably has a high concentration of mobile business with Apple which again highlights the risk of losing content in the next generation iPhone.
Skyworks management delivers on guidance and issued strong guidance (above consensus) for 1Q and the mid-term. The stock is trading at a depressed valuation and off 29% from it's high. The selloff seems well overdone with the broader market within 2% of it's high. Skyworks business is performing, but it's stock is on sale which looks like a buying opportunity.
Michael Grove, CFA