Update Marvell Technology Group (MRVL)

03/05/2010 1:48 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

After the market closed yesterday (March 4) Marvell Technology Group (MRVL) reported fourth quarter fiscal 2010 earnings of 40 cents a share (excluding items). That was 3 cents a share above the official Wall Street consensus. Revenue climbed 64% from the fourth quarter of fiscal 2009 to $843 million, just a tad above analyst consensus. Strength came in storage (sales up 5%) and networking (sales up 10%).

The best news in the current quarter, however, came on gross margins, which climbed 2.2 percentage points to hit 60%. That’s an all-time high for the chip company and is significantly above the 58.6% gross margin expected by Wall Street.

Normally the first quarter of the company’s fiscal year—the quarter that ends in April—shows a 7% to 10% seasonal decline in sales. In that context Marvell Technology Group’s guidance to Wall Street for a flat to 2% decline in that quarter counts as a sign of major continuing strength for the company. So too does the company’s increase in gross margin targets going forward to 58% to 60%. That indicates that Marvell believes the new margins are sustainable and the savings from its cost reduction program aren’t based on one-time gimmicks.

The conference call wasn't completely sunshine and buttercups, however. 

The one worry that management did express was over supply constraints in hard disk drive components and capacity constraints at chip foundries. (On the other hand that sounds like good news for Jubak’s Picks Taiwan Semiconductor Manufacturing (TSMC).)

The stock sold off slightly after hours on even this good news. Not surprising since Wall Street had conducted one of its maddening exercises in hyping results just before they’re announced in the days before Marvell reported. The consensus earnings estimate may have still been officially 37 cents a share, but in the days before the report I saw analyst notes calling for 39 cents or 40 cents.

That made the surprise much less of a surprise.

As of March 5, 2010, I’m raising my target price on Marvell Technology Group to $27 by December from the previous $26 by December target.

Full disclosure:  I own shares of Marvell Technology Group in my personal portfolio.
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