Skyworks: Set to Soar?

10/23/2015 7:00 am EST


Chris Versace

Editor, PowerTrend Bulletin, Growth & Dividend Report, and PowerTrader

This recommendation is part of our “Always On, Always Connected” power trend, explains growth expert Chris Versace, editor of Growth & Dividend Report.

Skyworks Solutions (SWKS) recently announced it is to acquire fellow semiconductor company PMC-Sierra (PMCS) for $2 billion, or $10.50 per share, in an all-cash transaction.

With $1.1 billion in net cash on its balance sheet, Skyworks can easily handle the transaction.

Even so, SWKS shares have traded down on the news, likely because of diversification concerns away from the company’s core radio frequency (RF), analog, and mixed-signal chips and related components business.

From my perspective, the management team at Skyworks is composed of shrewd operators who are experienced when it comes to identifying, acquiring, and integrating acquisitions.

Long-time investors will remember that Skyworks is the combination of the Conexant wireless business and Alpha Industries, a deal that has been well executed under the Skyworks management team.

It is this management team that has been moving into tangent wireless areas during the last few years, including the nascent Internet of Things (IoT) market.

Acquiring PMC-Sierra, a company that has semiconductor and software solutions for Big Data, improves Skyworks' position in that market.

A recent IDC forecast shows that the big data and services market will grow at a 26.4% compound annual growth rate to $41.5 billion through 2018 or about six times the growth rate of the overall information technology market.

While some may question this move, I see it as building on the company’s offerings as its core smartphone market matures and, in the next few years, becomes increasingly reliant on replacement demand instead of first-time buyers.

Upon completion of the acquisition, Skyworks expects annual revenues of more than $4 billion, with gross margin in the 55% range and operating margin exceeding 40%.

During the last several quarters, stand-alone Skyworks gross margins have ranged between 46-49%, while its operating margins have fallen between 29-32%. In other words, the transaction is expected to be wildly accretive to the company’s earnings.

Buried in the news, Skyworks raised its Q4 (September) guidance. It's business as usual for this under-promise and outperform management team.  Let’s use the current weakness in the shares to add to our SWKS position.

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