Marvell Technology Group

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Marvell Technology Group

  1. 1. Marvell technology Group Ltd Omar Khalil (MRVL) Date: March 22, 2006 Consensus Estimate 01/06 01/07 01/08 Sector: Technology EPS 1.04 1.82 2.11 Industry: Semiconductor P/E 51.73 29.58 25.51 Current Price: $53.84 Long Term Growth Rate: 29.86 52 Wk Price Range: $32.19 - $73.67 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 5,470,000 P/E (TTM) 51.73 26.21 30.69 21.55 Beta: 3.86 P/S (TTM) 10.25 4.74 5.18 2.89 Market Cap ($million): 15,450 P/B (MRQ) 5.13 4.02 5.69 3.94 Shares Out (million): 286.9 ROA (TTM) 10.72 11.43 11.37 8.06 Inst. Hold %: 73.1% EBO Valuation Div Yld: NA Recommendation: Total Debt/Equity: 0.01 Stop-loss Price: $43 Member S&P 500? No Price 6-mo prob 12-mo prob Target Price $69.31 49% 66% Investment Thesis Summary Fundamental Valuation: • Marvell Technology expects fourth quarter Negative: With a discount rate of 16.7% revenues to grow 8% from the third Marvell EBO valuation is $51.3, which is quarter’s $426 million. $51.3 below its current price Relative Valuation: • Recent acquisition of the hard-drive Neutral/ Negative: mixed indicators, but controller business from QLogic, is expected appears bearish. to increase fourth quarter revenues Technical Analysis: (approximately 13 to 15% from the third Negative: Most of the technical indicators quarter) were bearish showing a downward price trend. Earnings Analysis: • Marvell Technology Group raised its Positive: There were a significant number of outlook and expects full year 2006 revenue earrings surprises with earnings expected to of $1.615-$1.635 billion which is higher than increase over the next year. the $1.597 billion that was expected. Analyst Recommendations: • Significant number of earrings surprises with Positive: There were ten Buy, eleven earrings expected to increase gives investors Outperform and seven Hold. There was no confidence of the future performance of the significant changes over the past year. company Institutional Ownership: • Analysts’ recommendations were mostly buy Neural: the number of institutional owners and outperform. increased, but the fraction of shares held by . institutions decreased. Piotroski Analysis: The Piotroski score is 4 1
  2. 2. Company Summary Marvell Technology Group was incorporated in 1995. The company provides semiconductors of high- performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits. Marvell Technology also offers a range of integrated circuit solutions by using its communications mixed- signal processing and digital signal processing technologies. The company uses its technology in a variety of functions. The company’s range of products consists of storage, switching, transceivers, wireless, personal computers connectivity, gateways, communications controllers and power management products. In the Storage products, Marvell Technology offers a variety of storage products for hard disk drive electronics and storage interconnect technology. The company’s storage products consist of read channel products that are intended to permit customers to obtain high-areal density. Moreover, the company provides fast data-transfer rates for their hard disk drives that provide improved performance, lower power consumption and cost savings. In addition, the company provides preamplifier integrated circuits for enterprise, desktop and mobile storage systems that are used to move the head stack and control drive speed and other interconnect designed to replace the existing advanced technology attachment interface. In the switching products the company has a variety of solutions for the enterprise networking, carrier access and Small Office/ Home Office residential networking markets. Those switching products allow voice, video and data traffic to be impeccably carried through the network with full reliability. Furthermore, the company technology is allowing the emergence of packet-based Internet communications of real-time traffic. The Company’s switching products enable system manufacturers to build families of products that address high- density gigabit solutions for the enterprise and small and medium-size business. In the switching products they also have products that can reduce design complexities and time-to-market barriers specifically related with switch development. Other products like G. Link crossbars and bridges add integrated memory and support for advanced quality of service through support for packet prioritization. In the transceiver Products the company has a line of low-power, high-performance physical layer transceiver solutions for demanding networking applications. Marvell Technology Group provides these transceivers to the enterprise networking and storage networking markets. Other types of transceiver technologies accelerate the deployment of 10 gigabit capable systems for the local area network and wide area network markets and fast Ethernet transceivers that allow low power dissipation. In the wireless products, Marvell Technology offers performance and integration for WLAN users who demand 54 megabits per second and above wireless connectivity. The company wireless products ensures compatibility to the company’s wireless Institute of Electrical and Electronics Engineers, acceleration engines to support advance encryption standard wireless security and quality of service. These products vary from highly integrated home gateways to power efficient products to traditional client adapter card. Wireless Products In the PC connectivity products the company provides products that are designed for volume deployment of Gigabit PC connections. Some of the products Yukon family of single-chip desktop and server network connectivity solutions offers unprecedented integration of Alaska gigabit physical layer Device and mandatory access control technology with a comprehensive software suite. The Yukon devices are offered in an ultra- small form factor with low-power requirements and with a variety of manageability features. In the Gateway Products the company’s devices offers functionality, performance and security for business, SOHO and residential gateway solutions. The Link Street SOHO gateways provide a full-wire-speed, 100- megabits-per-second integrated gateway router solution. Gateway Products 2
  3. 3. In the communications Controller Products the company provides high-performance and highly integrated system and communication controllers. Marvell Technology Group controllers are used in a wide variety of functions, including routers, switches, digital subscriber line access multiplexers, access concentrators, wireless base stations, voice-over Internet protocol (VoIP) gateways and storage area networks. The company products in this segment also provides all of the required network interfaces that bridge the LAN with the Internet infrastructure and combines the majority of the general applications found in multi-service access routers into a single chip. In the Power Management Products the company offers a digital signal processing (DSP) Switcher integrated regulator modules provide plug-and-play implementations of the company’s switching regulator integrated circuits in convenient, modular from factors. The company also provides single in-line package, dual in-line package, or surface mount technology from factors that can be shared with a single programming resistor to set the desired output voltage.1 Competition and Strategy The main competitor for read channels and storage SOCs are Agere Systmes and STMicroelectronics. For the preamplifiers and motor controllers the company competes with Agere Systems and Texas Instrument. In addition, The Company competes with Agere Systems, Broadcom, Intel, National Semiconductor, Realteck Semiconductor and Vitesse Semiconductor on transceivers. The company’s switching products competes mainly alongside with Broadcom, Intel and Vitesse. Marvell Technology competes with Tundra and PLX Technology in the market for system controllers. the company competitor in the wireless LAN market include Agere Systems, Atheros, Broadcom, Conexant, Intel and Texas Insturment.Marvell Techonolgy’s competitors they are more likely to respond more quickly to evolving customer demands or devote greater recourses to research and development and develop low-priced products than Marvell Technology. The competitors comparative advantage include longer operating histories, greater name recognition, access to larger customer bases and greater financial, sales and marketing, manufacturing distribution, technical and other resources. The company’s key elements of their strategy include the expansion of the market position by developing New Signal Processing Technologies. The company is plan to continue to invest considerable resources in developing new and improved algorithms and enhanced analog, mixed-signal, digital signal processing and embedded microprocessor technologies. The company expects that their investment will allow them to develop products that can realize data transmission speeds approaching the fundamental limits of particular physical media infrastructures. Moreover, the company intends to develop and introduce new products that use off-the-shelf general purpose mixed signal and analog solutions for a wide range of markets presently providing conventional analog solutions. This strategy will allow the company to expend their reach into both vertical and horizontal markets and provide an added benefit of customer and market diversification. Furthermore, Marvell Technology plans to expend leadership position for Storage Market Application. The company plans to expend their leadership position in enterprise and mobile disk drives by working on the development and the introduction of products that allow higher data position in disk drives for the desktop personal computer division, in addition to disk drives used in emerging consumer electronics. Marvell Technology is also planning to pursue strengthening and expanding their relationships with customers. The company intends to design products and product functions to meet the changing needs of their customers. For example, the company often customizes their products to incorporate their customer’s specific requirements even though initially the products are designed to be used by multiple customers. The company also intends to continue to use widely available processes to manufacture some of their products. That strategy allow the company to reliably manufacture products in volume, eventually decreasing 1 www.moneycentral.msn.com and www.investor.reuters.com 3
  4. 4. time-to-market and costs, while at the same time making the development process of highly integrated products less complicated Marvell Technology relies on third parties to manufacture, assemble and test their products. Their fabless strategy enables them to channel their resources on the development of proprietary and pioneering mixed- signal and digital signal processing designs, while decreasing capital and operating infrastructure requirements.2 Historical Revenue and Earnings: Historical Revenue Historical Earnings FY 01/06 FY 01/05 FY 01/04 FY 01/06 FY 01/05 FY 01/04 1st Quarter 364.8 269.6 168.3 $0.20 $0.05 $0.02 2nd Quarter 390.5 297.2 192.9 $0.25 $0.10 $0.04 3rd Quarter 426.0 317.6 215.3 $0.29 $0.15 $0.04 4th Quarter NA 340.3 243.3 NA $0.18 $0.07 Total 1,181.3 1,224.7 819.8 $0.74 $0.48 $0.17 Marvell Technology revenues have increased from 2004 to 2006 in the first three quarters. From 2004 to 2005 revenues have increase throughout the whole year. Moreover, earnings from 2004 to 2006 have increased in the first three quarters. Earnings also have increased from 2004 to 2005. 2 www.moneycentral.msn.com (10K) 4
  5. 5. I. Fundamental Valuation Marvell technology Group PARAMETERS FY1 FY2 Ltg as of 3/25/06 EPS Forecasts 1.82 2.11 29.86% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 10.56 and a 7-year growth period. Discount Rate 16.70% Dividend Payout Ratio 0.00% Next Fsc Year end 2007 Current Fsc Mth (1 to 12) 3 Target ROE (industry avg.) 3.37% Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Long-term EPS Growth Rate (Ltg) 0.2986 0.2986 0.2986 0.2986 0.2986 Forecasted EPS 1.82 2.11 2.74 3.56 4.62 6.00 7.79 Beg. of year BV/Shr 10.560 12.380 14.490 17.230 20.788 25.409 31.409 Implied ROE 0.170 0.189 0.207 0.222 0.236 0.248 ROE (Beg. ROE, from EPS forecasts) 0.172 0.170 0.189 0.207 0.222 0.236 0.248 0.205 0.162 0.119 0.077 0.034 Abnormal ROE (ROE-r) 0.005 0.003 0.022 0.040 0.055 0.069 0.081 0.038 -0.005 -0.048 -0.090 -0.133 growth rate for B (1-k)*(ROEt-1) 0.000 0.172 0.170 0.189 0.207 0.222 0.236 0.248 0.205 0.162 0.119 0.077 Compounded growth 1.000 1.172 1.372 1.632 1.969 2.406 2.974 3.712 4.474 5.200 5.822 6.267 growth*AROE 0.005 0.004 0.030 0.064 0.109 0.166 0.241 0.142 -0.021 -0.247 -0.526 -0.835 required rate (r) 0.167 0.167 0.167 0.167 0.167 0.167 0.167 0.167 0.167 0.167 0.167 0.167 0.167 discount rate 1.167 1.362 1.589 1.855 2.164 2.526 2.948 3.440 4.015 4.685 5.467 6.380 div. payout rate (k) 0.000 Add to P/B PV(growth*AROE) 0.00 0.00 0.02 0.03 0.05 0.07 0.08 0.04 -0.01 -0.05 -0.10 -0.13 Cum P/B 1.00 1.01 1.03 1.06 1.11 1.18 1.26 1.30 1.30 1.24 1.15 1.02 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 0.03 0.02 0.11 0.21 0.30 0.39 0.49 0.25 -0.03 -0.32 -0.58 -0.78 Total P/B (P/B if we stop est. this period) 1.03 1.03 1.14 1.27 1.41 1.57 1.75 1.55 1.26 0.93 0.57 0.23 Implied price 11.35 11.28 12.55 13.97 15.54 17.29 19.24 17.02 13.91 10.19 6.27 2.54 Check: Beg. BV/Shr 10.56 12.38 14.49 17.23 20.79 25.41 31.41 39.20 47.25 54.92 61.48 66.18 Implied EPS 1.82 2.11 2.74 3.56 4.62 6.00 7.79 8.04 7.67 6.56 4.71 2.23 Implied EPS growth 0.159 0.299 0.299 0.299 0.299 0.299 0.032 -0.047 -0.145 -0.282 -0.526 Inputs: 1. EPS Forecasts and long-term growth rate (LTG) are from www.investors.reuters.com 2. Book value per share derived from 01/28/06 balance sheet. Total equity =3,046.1, Common stock outstanding= 288.38. Therefore, Book Value/Share Last fye)= 3,046.1/288.38= 10.56 3. Discount rate: The 20 year t-bond rate is 4.95, an expected return on the market of 9% and an adjusted beta of 2.90 (b^= 1/3+2/3 (3.86) = 2.90). This results in a CAPM discount rate = . 0495+2.90(.09-.0495) = 16.7% 4. Dividend payout ratio was not available 5. Next fiscal year-end is 2007 6. Current fiscal month is 3 7. Target ROE= 3.37%, the five year industry average. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $2.54 2. Changing the discount rate to 9% (decrease of 7.7%), the EBO valuation changes to $9.82, which puts the EBO valuation $44.02 below the current price. 3. Changing the growth rate to 19.86% (decrease of 10%) the EBO valuation is $7.48 4. Changing the industry ROE to 13.37% (increase of 10%) the EBO valuation is $35.43 The EBO valuation is $2.54 well below the current price of $53.84. When the discount rate was changed form 16.7% to 9% the EBO valuation was still below the current price at $9.82. Decreasing the growth rate to 19.86% from 29.86% still provided an EBO valuation of $7.48 which is well below the current price of $53.84. On the other hand, increasing the industry ROE by 10% provided an EBO valuation of $35.43 that is somewhat close to the current price. 5
  6. 6. II. Relative Valuation Comparables Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S 1 TXN Texas Instrument, Inc. 49.43B 30.89 1.76 17.55 17.06% 1.03 4.46 7.89% 0.57 3.85 2 INTC Intel Corporation 115.3B 19.60 1.25 15.68 12.66% 1.24 3.21 14.10% 0.23 3.12 3 ADI Analog Devices, Inc. 13.94B 38.08 1.88 20.26 18.17% 1.11 3.76 10.87% 0.35 5.98 4 AMAT Applied Materials, Inc. 28.46B 17.94 1.12 16.02 14.86% 1.08 3.28 8.21% 0.40 4.16 MRVL Marvell Technology Group Ltd. 16.57B 57.77 2.11 27.38 29.86% 0.92 5.47 -0.51% (10.73) 10.92 Implied Price based on: P/E PEG P/B Value P/S 1 TXN Texas Instrument, Inc. $37.03 $64.82 $47.10 -$3.04 $20.37 2 INTC Intel Corporation $33.08 $78.03 $33.90 -$1.23 $16.51 3 ADI Analog Devices, Inc. $42.74 $70.24 $39.71 -$1.86 $31.64 4 AMAT Applied Materials, Inc. $33.80 $67.91 $34.64 -$2.15 $22.01 High $42.74 $78.03 $47.10 -$1.23 $31.64 Low $33.08 $64.82 $33.90 -$3.04 $16.51 Median $35.42 $69.07 $37.18 -$2.01 $21.19 Indicator Interpretation P/E Bearish: Marvell Technology has the highest P/E ratio when compared with their competitors. This implies that they either have a high growth rate or they are overvalued or less risky. PEG (P/E/G) Bullish: PEG ratio is lower than Marvell’s competitors. It could be driven by high growth rate. P/B Bearish: Marvell has the highest P/B among its competitors. This indicates that the company is potentially overvalued, less risky or has high ROE. Value (P/B/ROE) Bullish: Marvell’s value ratio is undefined (negative ROE and value ratio) P/S Bearish: Marvell’s P/S ratio is the highest compared to its competitors indicating either the stock is over-valued, less risky or have a higher profit margin. Summary Marvell Technology forward indicators (P/E, P/E/G) are mixed, as are its historical indicators (P/B, Value, P/S). Future indicators appear to be driven by high growth rate. Overall, relative valuation shows neutrality and also the market optimism concerning Marvell’s future earnings 6
  7. 7. III. Technical Analysis Indicator Interpretation Bollinger Bands Bearish - price is close to the outside band, it will soon move big Stochastics Bearish - %K is below %D, the gap appears to be increasing (bearish) Moving Averages Neutral - Price is below the Moving Averages, which is a bearish indicator. The gap has continued to increase; bearish indicator. MACD Bearish - MACD is negative and below the signal like, a bearish indicator. Regression Bearish - Price is on downtrend. The price is approximately at the regression line; little divergence PriceROC Bullish - Roc is higher than zero and the slope is increasing (bullish) 7
  8. 8. IV. Earnings Analysis Earnings Surprises 01/06: 10/05: 07/05: 04/05 01/05 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate 487.71 420.78 387.11 360.68 337.59 Actual 489.02 426.03 390.45 364.77 340.27 Difference 1.31 5.25 3.35 4.09 2.68 Mean Earnings Estimates 04/06: This 07/07: Next 01/07: This 01/08: Next LT Growth Quarter Quarter Fiscal Year Fiscal Year Rate Earnings 0.41 0.44 1.82 2.11 29.86 # Estimates 27 26 27 20 11 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Down Revised Up Revised Down Quarter ending 04/06 0 0 10 3 Quarter ending 07/07 0 0 14 1 Year ending 01/07 0 0 18 1 Year ending 01/08 0 0 6 0 Marvell experienced positive earnings surprises during four of the past five quarters. This indicates that analysts have not been accurate in their predictions about the company. The significant number of earnings surprises is a positive indicator. The mean earnings estimates show that analysts believe there will be an increase in earnings next quarter. The positive outlook is probably due to the strong growth and design activity for an increasing number of different consumer and enterprise application that the company is experiencing. There have been five revisions downward in the last month and 48 upward revisions. On the other hand, there have been no revisions during the last week. 8
  9. 9. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 10 11 12 5 Outperform 11 11 10 7 Hold 7 6 5 6 Underperform 0 0 0 1 Sell 0 0 0 1 No Opinion 0 0 1 1 Mean Rating 1.89 1.82 1.74 2,30 Analyst’s recommendations have increased since one year ago. Most of the revisions were Buy and Outperform recommendations. There were some Hold recommendations but Buy and Hold recommendations weigh more. It’s not surprising that analysts have not downgraded the stock since the company has been exceeding their expectations. 9
  10. 10. VI. Institutional Ownership # of Holders % Beg. Holders Shares % Shares Shares Outstanding 388,417,067 100.00% Total Positions 324 109.09% 209,745,216 54.00% New Positions 62 20.88% 4,133,684 1.06% Soldout Positions 32 10.77% -1,999,611 -0.51% Buyers 177 59.60% 20,076,662 5.17% Sellers 150 50.51% -23,206,264 -5.97% Beg. Total Inst. Positions 297 100.00% 212,874,818 54.81% # Net Buyers/3 Mo. Net Chg. 27 9.09% -3,129,602 -0.81% Marvell increased its number of institutional investors by 27, which shows a bullish indicator. In addition, there has been a -0.81% decrease in the number of shares held by institutions, which is a bearish indicator. This means that big companies are lowering the fraction of holding by selling them to smaller companies. 10
  11. 11. VII. Piotroski Analysis A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): ________________ P/B ratio greater than P/B ratio less than 1 (Growth) 3.22 2 2.15 3.22 3 1.62 2.15 4 1.14 1.62 5 (Value) 1.14 B. Piotroski Score: _____4___________ Piotroski Item Variable needed to compute Value Points 1. Positive net income TTM net income 288.8 1 2. Positive cash flow TTM cash flow 331.8 1 3. Earnings Quality 1 4. Decreasing Debt Debt/assets most recent ann figure 1.12 Debt/assets previous ann figure 1.11 5. Increasing working capital Current ratio most recent ann figure 4.74 Current ratio previous ann figure 3.44 6. Improving Productivity Asset turnover most recent ann figure 0.5 Asset turnover previous ann figure 0.4 7. Growing Profitability ROA most recent ann figure 5.42% ROA previous ann figure 2.01% 1 8. Issuing Stock Shares outstanding most recent ann 299M Shares outstanding previous ann 276M 9. Competitive Position Gross margin most recent ann 52.5% Gross margin previous ann 53.4% Total 4 11
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  13. 13. for a recent study of the Piotroski model. 13

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