Adelman initiates SKWS as a BUY
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The DCF model reveals the intrinsic value of the corporation is higher than the market capitalization. The fair price range for the stock is estimated to be $119-127, representing 12-19% upside potential. The stock is currently trading around 105$
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Adelman initiates SKWS as a BUY
- 1. (SWKS) Dane Adelman Connecting Everyone and Everything, All the Time
- 2. Company Overview Key Statistics One Year Stock Performance |2 21% 18% 11% • Founded in 1962 • Semiconductor Industry • Include a portfolio of a wide range of products • Over 1,800 worldwide patents • Went public in 1990 as NASDAQ:SWKS • Competitors: Intel, Linear Technologies • Woburn, MA • North America, Japan, Asia, Europe Value EV/EBITDA 12.46 EV/Sales 5.16 Price/Book 5.01 Price/Earnings 18.95 ForwardPEG 1.1 CapitalStructure Debt $0 Cash & CashEquivalents $1.1bil QuickRatio 6.41 Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Market Date Current Price $105 Market Cap 19.5bil Dividend Yield 1.14% FCF per share 6.85 Revenue $3.5bil 52 Week Range 63.30-113 Beta .71 EPS 4.85 Source: Bloomberg
- 3. Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Appendix 4 8 11 17 22 24 Investment Thesis & Overview QUALITY - SUSTAINABILITY - SUPPLIERS
- 4. Investment Thesis |4 Increased placement of products across many industries Production components are getting cheaper- right in time for an increase in production The Internet of Things offers/ Growing LTE Market, especially in Asian and North American economies Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts 1. Providing high quality and reliable solutions for tech companies including Apple and Amazon translates to revenue and growth. 2. Their presence in “Internet of Things” products, and innovative medical and automotive products coupled with a strong foothold with content per device Recommendation We recommend SWKS a BUY with a 12-month price target of $124 – representing a potential upside of 13% from the current share price of $107
- 5. |5Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Wearables Medical Consumer Electronic Auto Connected home Networking Mobile Aerospace and defense CATV Products Media
- 6. Industry Trends Wireless Infrastructure IoT |6 • Mature markets are focused on wireless infrastructure, including 3G, 4G, LTE and even 5G networks, to provide reliable power, and enhance security/privacy needs for mature products • Physical devices and objects becoming “smart,” with internet capabilities • This links mobile devices, wearables, smart appliances, connected cars, and other gadgets to the cloud and each other Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Wearables • Retailers are looking to reach customers directly and spark incremental purchases through wearable technology Contextu al Awarene ss Interactio n Personalizati on 0 1 5 3 0 4 5 6 0 2016 2017 2018 2019 2020 2021 Millions Tech Wearables Wearables Source: Skyworks Solutions
- 7. Industry Trends Cont. • From delivering turn-by-turn directions to finding your favorite restaurant, the connected car has become one of the latest devices to offer consumers greater connectivity and enhanced safety Automotive Industry Automotive IOT Revenue Smartphone Market • Apple is expected to build 120 million new iPhones for their upcoming release • The smartphone market is expected to grow 16% annually 0 500 1000 1500 2000 2500 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E MillionUnits $0 $10 $20 $30 $40 $50 2014 2015E 2016E 2017E 2018E 2019E InBillions Asia-Pacific Americas EMEA Smartphone Unit Forecast Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts |7
- 8. Competitor Profile Competitor Overview • Skyworks is in a competitive industry that is expanding rapidly by increasing in over 5% growth from year to year • Larger companies have acquired smaller semiconductors similar to Skyworks Competition Latest Trends • Hiring highly skilled workforce for research and development • Access to investment funding to finance new ideas and products • Willingness to take on technical research and development Intel Corporation 16% Samsung Electronics 10% Qualcomm 4% TexasInstruments 4%Other 66% Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Semiconductor Manufacturing |8
- 9. |9 Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts 88% 1% 3% 94% 2% Rev. Exposure by Region Africa and Middle East America Asia/Pacific Europe
- 10. LTE Market Poised to Expand Worldwide • Over 80% of the Chinese population are on 2G or 3G • Released world’s first solution optimized for LTE category M Applications • Chinese consumer appears to still be on track to upgrade to 4G, 5G • LTE dropping in price faster vs. 3G |10Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Source: CNBC
- 11. |11Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Apple Correlation R^2= .5 R=.8 Source: Bloomberg
- 12. Macro Environment |12 Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Government Integration Cyclical Sectors Interest Rates Infrastructure Spending Pro business stance Markets at all time high
- 13. Analysis EPS Projections Impressive Metrics Company EV/EBITDA2017E EV/EBITDA2018E SWKS Peer GroupAverage Company P/E 2017E P/E 2018E SWKS Peer GroupAverage Company EPS 2017E EPS 2018E SWKS Peer GroupAverage SOX Index Outperforms S&P 500 40 60 80 100 120 140 160 12/31/2015 3/31/2016 6/30/2016 9/30/2016 12/31/2016 3/31/2017 SPX Index - S&P 500 Index SOX Index - Philadelphia Semiconductor Index Analysis Takeaway SWKS continues to enjoy increasing earnings per share from reinvestment of cash, yet stock price does not reflect high profitability SOX Index has outperformed theS&P 500 since June 30, 2016 |13Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts 0.75 1.2 1.12 1.47 2.4 4.15 4.93 5.32 6.33 7.2 0 2 4 6 8 10 EPS Expon. (EPS)
- 14. $1,569 $1,792 $2,292 $3,258 $3,289 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 43.4% 43.4% 45.2% 48.2% 51.0% FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Revenue ($M) Gross Margin 24.5% 25.5% 30.0% 36.0% 37.8% OperatingMargin $1.91 $2.20 $3.24 $5.27 $5.57 FY 2013 FY 2014 FY 2015 FY 2016 Earnings Per Share FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2012 . Financials Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts |14 Source: Skyworks Solutions
- 15. Risks – Skyworks Specific • Increased competition could lead to a failure to secure deals from major customers • SWKS’s heavy reliance on Apple • Mitigation: expanding its operations in IoT will decrease its reliance on Apple • Slowing growth of mature products • Mitigation: Emerging markets, such as India/asia, are experiencing more aggressive growth in products and therefore, SWKSwill be able to tap into that arena |15Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts
- 16. Management David Aldrich (Executive Chairman) Liam Griffin (CEO) Peter Gammel (CTO) • 60, is chairman of the board and executive chairman of Skyworks Solutions, Inc., Mr. Aldrich had served as chief executive officer since the company was formed in 2002 via a merger between Alpha Industries and Conexant Systems' wireless business. • Mr. Aldrich received a bachelor's of arts in political science from Providence College in 1979 and a master's in business administration from the University of Rhode Island in 1981. In 2004, he was named Ernst & Young New England Entrepreneur of the Year in the Semiconductor category. • 51, is president and chief executive officer and a director of Skyworks Solutions • Before joining Skyworks, he was the vice president of worldwide sales at Dover Corporation and held product management and process engineering positions at AT&T‘ • Mr. Griffin received a bachelor's of science in mechanical engineering from the University of Massachusetts, Amherst, and a master's of business administration from Boston University • 57, is chief technology officer for Skyworks Solutions, Inc. He joined the company in June 2011 as part of Skyworks' acquisition of SiGe Semiconductor. • Dr. Gammel received a bachelor's of science in physics and mathematics from Massachusetts Institute of Technology and a Ph.D. in physics from Cornell University. Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts |16 Source: Skyworks Solutions
- 17. |17 Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Thank you! Stock recommendation for MAI Capital Q&A
- 18. |18 Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Valuation: DCF Modeling
- 19. |19 Investment Thesis & Overview Industry Dynamics Growth Opportunities & Drivers Valuation Risks & Final Thoughts Valuation: DCF Modeling
Editor's Notes
- 15 years ago, chipmaker Alpha Industries merged with Conexant Systems. Both companies produced RF chips, power amplifiers, and other communication chips for a wide range of industries. The new company was named Skyworks, which promoted itself as a "pure play" wireless integrated circuit company.
- -Headquarters are in Woburn Mass, however production facilities are located in Mexico, California, and Japan -Skyworks is the 9th largest in the industry with the largest competitor being Intel is best known as a supplier of chips used in Apples iPhone but has been quickly expanding into other markets, such as home automation and driverless vehicles, and its products are becoming increasingly critical as technology companies look for innovative ways to connect their devices.
- Their P/E, EV/EBITDA (enterprise value) , and EV/EBIT multiples are significantly lower than the industry average indicating that it is undervalued and a “cheap” stock. Drivers: 4G penetration at 27% in 2015, to 75% by 2020
- semiconductor specialist that supplies chips to a wide variety of markets, including: mobile, automotive, broadband, wireless infrastructure, home automation, industrial and military. Its chips are used in wireless devices to support in sending and receiving data. Its products include: power amplifiers and front-end modules used by mobile device companies as well as RF chips used in a variety of industries. These chips are essential for many machine-to-machine communications that form the foundation of the Internet of Things, technologically innovative products, and wireless infrastructure . Skyworks NOW aims to diversify by expanding to other vendors in the premium and mid-tier smartphone markets. It's making modest inroads beyond smartphones, as it has delivered healthy growth in its broad-markets segment. Expansion of wireless connectivity into the Internet of Things and automobile and wearables are drivers, which should contribute over the longer-term
- Experts predict that there will be 34 billion connected devices by 2020, IoT accounting for 24 billion. An estimated $6 trillion will be spent on IoT over next five years. Skyworks’ highly innovative systems are scalable on virtually any platform SWKS best positioned to innovate and capture this growing market Connected home, connected car, major customers include: Hive, NEST, Honeywell, Bose, GM, land rover, jaguar Skyworks technology continues to push wearables to new heights in functionality in these areas
- Skyworks’ automotive solutions are enabling new convenience and safety features in everything from remote keyless entry, to collision avoidance, toll transponders, garage door openers, lighting, infotainment, video displays and vehicle tracking Skyworks' competitive advantages lie in its unique ability to bundle an increasing number of complex connectivity functions into a single, space-saving chip. As an innovator of high performance analog semiconductors enabling connectivity across a broad range of end markets, their devices support Cellular / Smartphones. Leveraging their systems expertise and broad product portfolio, partnered w/ their customers to develop solutions that solve increasingly complex analog design challenges.
- Acquisitions of smaller players among the largest direct competitors are increasing, Skyworks is also the chipmaker that nearly bought PMC-Sierra for $2 billion in late 2015, but was eventually outbid by Microsemi Skyworks credited its strong return to the success of several new product launches, including components used by Huawei, Samsung Electronic’s Galaxy S8 platform, Cisco Systems and Nintendo Co.’s Switch gaming consoles The company also secured several design and networking contracts (lockheed martin) that should boost revenue in the upcoming quarter. The company won contracts with three leading auto manufacturers to provide advanced LTE modules and antenna switches, supporting high-reliability connectivity, GPS and data transport capability. In addition, it extended WiFi mesh networking contracts with Google and Plume.
- Skyworks should make progress on its longer-term 53% gross-margin target, helped by improved revenue growth, coupled with the mix shift from power amplifiers to higher-margin integrated mobile systems. Strong expense discipline has bolstered Skyworks' operating leverage and should help it achieve 40% operating margin. The longer-term shift toward 5G wireless and growth in Internet of Things could further enhance Skyworks' margin should Broad Market sales play a larger role.
- expansion to 4G LTE will explode in next few years in emerging markets Growth of LTE will require innovations in data capacity, Skyworks is leader in this technology LTE-M is the abbreviation for LTE Cat-M1 or Long Term Evolution (4G), category M1. This technology is for Internet of Things devices to connect directly to a 4G network, without a network and on batteries. It's cheaper. Devices can connect to 4G networks with chips that are less expensive to make, because they have a narrower bandwidth. Long Battery Life. Devices can enter a "deep sleep" mode called Power Savings Mode (PSM) or wake up only periodically while connected. Service Costs Less. Because the maximum data rate of LTE-M devices is only about 100 kilobytes or Data rate unite in turn they do not tax the 4G network as much. Carriers can offer service plans that priced closer to old 2G M2M pricing than 4G pricing. notably, the 5G upgrade cycle is also a major tailwind for the company. Moreover, the company also enriched its product portfolio by launching high efficiency power amplifiers for advanced LTE applications. The demand for this highly integrated architecture is increasing with the transition from 4G to 5G technology.
- One risk that emanates from Skyworks' dependence on Apple (NASDAQ:AAPL), with as much as 44% of its revenues coming from the latter in FY 2015. Apple's contribution to the company's top line has reduced, coming in at less than 40% in the latest quarter. the iPhone 6s requires two Skyworks components versus the latest model, the iPhone 7, which requires four components and 5-6 in there next generation of their flagship phone. As the technology in phones continue to improve, Skyworks components will comprise a larger content share and push sales higher, even if phone sales are flat. Skyworks is also working to diversify its revenue sources, and curb its dependence on Apple. However, there's no doubt that this risk still persists, for now at least.
- Cyclical sectors like the information technology have historically shown the strongest correlations to interest rates This makes sense given that inflationary pressures and higher interest rates often come on the heels of strong economic growth. Therefore, the Fed’s indication that it plans on an interest rate hike bodes well for IT stocks. Moreover, the markets reached all time high after Trump was elected. (All political views aside) One explanation is Trump’s pro-business stance, which brings expectations that he’ll roll back regulation and cut corporate taxes; another is that investors are bullish about the increased infrastructure spending that Trump promises. Being that governments and businesses are beginning to implement technology into their everyday system and the growth of IoT indicates areas of potential growth for SWKS.
- Looking to Skyworks, the company manufactures over 2,500 chips, including analog semiconductors, switches, and amplifiers, to a roster of over 2,000 customers. At a high level, Skyworks' competitive advantages lie in its unique ability to bundle an increasing number of complex connectivity functions into a single, space-saving chip. This unique ability made Skyworks an invaluable supplier to smartphone and tablet makers, and the company has been handsomely rewarded as mobile devices have proliferated in the past decade.