Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).
The latest six-week period covered in our latest Industry Price Performance rankings was a decent stretch for the equity markets. The bull market has wobbled a bit in March, as investor unease has risen in the face of unsettling developments in Ukraine and concerns about the prospect of higher interest rates in the U.S. Still, the major market benchmarks managed to show modest gains for the six-week period end March 25th. The S&P 500 Index was up 2.5% over this stretch, while the gains on the more volatile NASDAQ Composite were a modest 1%.
In this environment, an industry needed to climb nearly 9% over the past six weeks to qualify for a spot in our top seven. The Power Industry rose 15.4% to take home the top spot, while a 13.7% advance by Newspapers was good for second place. Other groups helping to lead the market higher included Air Transport (up 11.3%), Railroad (10.9%), Semiconductor (9.2%), Semiconductor Capital Equipment (8.6%), and Retail Store (8.5%). In looking for investment ideas among these seven industries, we are taking a closer look at Skyworks Solutions, Inc. (SWKS). Along with Integrated Device (IDTI), Lattice Semiconductor (LSCC), SunEdison Inc. (SUNE), and TriQuint Semiconductor (TQNT), this stock has been on a tear so far in 2014, helping to lift the Semiconductor group to its lofty standing in our industry ranks.
Skyworks Solutions offers high-performance analog semiconductors for a wide variety of applications, including automotive, broadband, wireless networking, and smartphones & tablets. The company was founded in 1962, but only adopted the Skyworks name in 2002 following a business combination. Skyworks, which is based in Woburn, Massachusetts, has engineering manufacturing, and sales operations in Asia, Europe, and North America. It generated 93% of its 2013 revenues in Asia, including 55% in China, though this mix is not necessarily indicative of the geographic end markets that drive demand for the company’s products.
The company has compiled a strong operating record so far this decade. Annual revenues have more than doubled since 2009 (about 22% per annum), and will likely advance another 12%, to $2 billion, in fiscal 2014. (Year ends September 26th.) Increasing adoption of smartphones (versus traditional cellphones), rising demand for tablet computers, and an expanding product portfolio have helped to power this growth. Meanwhile, the top-line gains have flowed through nicely to the bottom line, which rose more than 38% in fiscal 2013, to $2.00 a share, and should climb another 13% this year.
Investors should note, though, that Skyworks’ fortunes are closely tied to those of a couple of key customers. Specifically, Apple and Samsung, together, accounted for just over half of 2013 revenues, meaning setbacks at these two leaders in consumer electronics would likely reverberate through their supplier’s operating results.
Meanwhile, finances are in good shape. Indeed, the balance sheet carries no debt, while the cash coffers have swelled to nearly $650 million, up from $306 million since the start of fiscal 2013. Too, operating cash flow usually exceeds capital spending by a comfortable margin. The company has typically utilized some of its cash for acquisitions that help to bolster the product portfolio and accelerate the push into new markets. However, 2013 was a quiet year on this front. Instead, the company stepped up its stock buybacks, leading to a 3% decline in the share base.
Overall, we think SWKS stock is a good selection for investors seeking exposure to the semiconductor industry. These shares clearly have momentum on their side, rising roughly 70% in the past year, and our Timeliness Ranking System pegs them to outperform the broader market in the six to 12 months ahead. Too, this equity trades at a reasonable valuation that leaves room for healthy price appreciation potential to 2017-2019, by which time we project annual earnings will have surpassed $3.00 a share. Notably, the stock’s current P/E is just a shade below 19 (based on estimated 12-month earnings through the 2014 September quarter). This is nearly identical to the broader market, but a discount to the typical chip stock, which now trades closer to 23- to 24-times earnings.
That said, these shares might cause some unease for more conservative investors, particularly those with an income orientation. The stock has an Average (3) rank for Safety, but its Price Stability score of 25 (on a scale from 5 to 100) suggests it will be more volatile than the typical equity. Too, the company currently doesn’t pay a dividend, as management appears to prefer keeping its powder dry for acquisitions or share repurchases. Our projections don’t anticipate that it will initiate a cash payout in the upcoming 3 to 5 years, though we wouldn’t rule out this possibility. Skyworks is one of the largest semiconductor developers (by market capitalization) that doesn’t pay a dividend, and it will likely continue to generate healthy amount of free cash flow as we move into the second half of the decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.