Looking for a great way to play the “Internet of Things” and the coming global tidal wave of mobile phone upgrades to 4G? Look no further than Skyworks Solutions (SWKS – Analyst Report).
Skyworks is an innovator of high performance analog semiconductors with customers across automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. They are probably most recognized as the supplier of RF (radio frequency) chips in Apple (AAPL – Analyst Report) iPhones and other handset and device makers.
When I heard CEO Dave Aldrich speak earlier this year about his company’s products helping create the “Internet of Things” I became very interested in the company and its growth potential. The massive connectivity trend to link personal devices to cars, homes, computers, appliances, and networks is just beginning to take off and Skyworks intends to be at the center of it.
Strong Quarter, Great Outlook
Today I’ll talk about the core fundamentals of this $12.5 billion tech company and what made them become a Zacks #1 Rank this month. Then we’ll cover the big institutional buying that is driving this stock to new highs.
On November 6, SWKS reported a strong September quarter (their Q4 for FY14) and guided the current quarter well above consensus.
They beat an already-positive preannounce from mid-October with non-GAAP EPS of $1.12 and revenues of $718 million, up 51% year-over-year and beating top line estimates by roughly $35 million.
And that revenue surprise not only took full year 2014 top line growth to 28%, but inspired analysts to now project nearly 30% growth for next year too.
That optimism is due in part to the impressive company outlook for 1QFY15 sales/EPS expected at $770M/$1.18, well ahead of the consensus $728M/$1.08.
Much of this growth is due to Apple iPhone6 sales. But the company and analysts see encouraging growth in enough other segments and customers to justify significant estimate hikes for top and bottom lines. They raised the new FY15 consensus from $3.64 to $3.98 and FY16 from $4.19 to $4.72, over 12%.
Analysts Jump On Board
Following this great report, analysts were not only raising estimates but their price targets (PT) as well. Bank of America analysts raised their PT to $75 while Raymond James bumped theirs to $77.
And Oppenheimer analysts had this to say…
We believe the current RF “boom cycle” remains early innings as LTE devices proliferate, and we see SWKS as a top beneficiary. We are reiterating our Outperform and bumping our target from $65 to $80.
Stern Agee analysts noted many positives in their report where they were inspired to raise estimates and the stock PT to $72, including the company winning $20 worth of content sales in new car “infotainment” systems.
They see FY16 EPS estimates of $6 even without potential M&A activity, noting that “SWKS with its filter partnership noted it can drive incremental 52% GMs versus current ~46% GMs. We believe with strong topline growth, improving GM-OM, SWKS can drive F16E EPS of ~$6. Versus peers we believe the opportunity for investors in SWKS is that the company still has a substantial M&A opportunity and an ~$500-700M FCF (free cash flow) opens up opportunity for dividends-buybacks.”
That’s some nice Free Cash Flow at $500 to $700 million. But the annual revenue estimate raises from Stern Agee are stunning…
F15E from $2.6B to $3.1B
F16E from $2.9B to $3.8B
And since this flurry of optimism from the analysts, on November 12 Skyworks raised their share buy-back plan to $300 from $250 million (of which about $63 million was left).
Just Scratching The Surface In China, India Up Next
Analysts at Craig-Hallum made some interesting points about the global upgrade to 4G that Gartner believes will see 8 billion new smartphones sold in the next three years.
“We believe the China 4G smartphone market is still in early innings as less than 5% of Chinese consumers use a 4G smartphone. Every time a Chinese consumer replaces their 2G phone with a 4G phone, the total RF content goes up ~5-10x. We estimate the total RF content in a 2G phone is roughly $0.60 compared to roughly $4.00-$8.00 in a 4G smartphone, therefore providing SWKS, one of largest RF suppliers for smartphones, ample fuel for top line growth in the coming years. Additionally, we believe the same accelerated shift to 4G in China is beginning to unfold in India, which would further extend the company’s already growing TAM (total addressable market).”
Craig-Hallum analysts also addressed the perception that Skyworks is too dependent on Apple. The company’s revenue breakdown doesn’t argue for that and the analysts believe this is actually a good problem for SWKS to have…
“While we believe Apple’s record iPhone 6/6+ sales will be hard to beat (until perhaps next year), we believe Apple will remain an important customer for SWKS in years to come and look for SWKS to maintain and improve its dominant presence in Apple products with ~$5.50 in content in the iPhone 6/6+. Moreover, we look for more bands in Apple’s next phone leading to more dollar content for SWKS. As a result, we believe SWKS will continue to ride the coattails of any major product launch at the consumer electronics giant.”
Whales Aboard Skyworks
The list of big funds adding to SWKS in Q3 was impressive. Yes, some took profits in Q3 like Wellington Management selling 2/3 of their position. But they still hold 2.2 million shares. And take a look at who was happy to take those shares off their hands…
Top 15 Q3 Buyers
BANK OF AMERICA CORP 5,034,647 ADDED 1,343,539
BARCLAYS GLOBAL INVESTORS UK 6,954,707 ADDED 1,103,249
BANK OF MONTREAL 3,038,520 ADDED 933,548
BLACKROCK GROUP LTD 1,004,240 ADDED 683,938
SYSTEMATIC FINANCIAL MANAGEMENT 1,798,419 ADDED 627,595
OPPENHEIMER FUNDS INC 2,599,124 ADDED 588,150
ARROWSTREET CAPITAL 1,631,496 ADDED 574,797
PEAK6 INVESTMENTS 543,836 ADDED 540,536
VICTORY CAPITAL MANAGEMENT 527,772 NEW
STATE OF TENNESSEE 767,485 ADDED 484,746
GREYSTONE MANAGED INVESTMENTS 481,078 NEW
MANAGED ACCOUNT ADVISORS LLC 892,722 ADDED 485,983
ALLIANCEBERNSTEIN L.P. 568,619 ADDED 424,290
VANGUARD GROUP INC 11,247,446 ADDED 418,932
ALLIANZ ASSET MANAGEMENT 1,667,818 ADDED 394,720
The list above is just the biggest buyers in Q3. Notice that Vanguard at #14 (by size of Q3 buy) is actually the largest holder with 11.2 million shares and they still nibbled on 418k shares.
Investing for the Connected Future
Here are the other top holders, with amounts sold in Q3 in parentheses…
AMERIPRISE FINANCIAL INC 6,993,260 (526,276)
BLACKROCK FUND ADVISORS 5,832,173 ADDED 251,230
STATE STREET CORP 4,982,366 ADDED 104,327
FMR LLC 3,962,445 (16,299)
BANK OF NEW YORK MELLON 3,455,681 ADDED 187,088
MUNDER CAPITAL MANAGEMENT 3,412,088 (48,050)
PNC FINANCIAL SERVICES GROUP 1,945,845 ADDED 163,315
AQR CAPITAL MANAGEMENT 1,874,692 ADDED 261,365
And if the natural question comes to mind, “What if these guys start selling?” you would not be alone. But think about it this way: most institutional money managers buy a stock based on a fundamental thesis that extends well beyond a few quarters. They are adding shares here in the aggregate, knowing full well who else owns them, because they are looking forward to this company’s future at the heart of the connected world.
Bottom line: SWKS has lots of solid institutional buying and continued support in an industry — chips — where valuations rarely get out of hand. But as we’ve learned recently with Avago (AVGO – Analyst Report) and Ambarella (AMBA – Snapshot Report), your specialty semiconductor providers can command higher valuations because they are not commodity plays.
And that’s why investors will continue to pay 12-15X for Skyworks growth giving us a run for $70+ soon.
Disclosure: I own shares of Skyworks Solutions for the Zacks FTM Trader.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money Trader.