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Skyworks: Solutions for the Internet of Things
09/07/2017 2:54 am EST
We re-recommended the stock in October 2015, and the stock has grown nearly 30% since that date. We think it’s time to take another look based on the recent pullback in price and the company’s near- and long-term prospects.
Technology experts predict there will be 70 billion connected devices operating worldwide by 2020. Skyworks Solutions is one of the companies that is best-positioned to capitalize on any number of emerging opportunities collectively known as “the Internet of Things.”
Skyworks Solutions makes analog semiconductors used in mobile and connected electronic devices. Its products are used in a wide array of applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable markets.
Along with the iPhone, its chips are now used in the Galaxy S8. Since 1997, sales at Skyworks Solutions have grown at a consistent annualized rate of 19.7%, although growth leveled off in 2016. During the decade, EPS grew at an annualized 32% rate.
We see likely long-term EPS growth of at least 15% annually, atop revenue growth of 13% and with some margin expansion to continue to boost the bottom line.
Competition remains a threat to Skyworks, but the company has combated this by continuing to innovate and continuing to improve efficiency of its design and manufacturing processes.
Pre-tax profit margins have been climbing steadily over the past five years, reaching 36.6% in fiscal 2016. Skyworks Solutions has no debt, and strong cash flow, with a free cash flow margin of 18%. The balance sheet includes $1.44 billion in cash.
Our selected high P/E ratio, 23.2 is near the highest P/E ratio of the last 52 weeks; multiplied by EPS of $9.78 and a future high price of $243 is indicated. On the downside, a low P/E of 11.9 times trailing 12-month EPS of $5.18 delivers a future low price of $61.
A maximum buy price of $107 is recommended, and the upside/downside ratio from the current price of $101 is 3.6 to 1. The projected total annual return for Skyworks from the current price is 19.9%.
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