SWKS Stock Study (9-17-24)

Posted by Mark on November 1, 2024 at 06:56 | Last modified: September 17, 2024 14:44

I recently did a stock study on Skyworks Solutions, Inc. (SWKS) with a closing price of $97.25.

M* writes:

     > Skyworks Solutions produces semiconductors for wireless
     > handsets and other devices that are used to enable wireless
     > connectivity. Its main products include power amplifiers,
     > filters, switches, and integrated front-end modules that
     > support wireless transmissions. Skyworks’ customers are
     > mostly large smartphone manufacturers, but the firm also
     > has a growing presence in nonhandset applications such as
     > wireless routers, medical devices, and automobiles.

Over the last 10 years, this medium-size company grows sales and earnings at annualized rates of 7.6% and 9.8%, respectively. Lines are up, cyclical, and parallel with YOY EPS declines in ’18 and ’22 and sales+EPS declines in ’19, ’20, and ’23 (FY ends 9/30). Five- and 10-year EPS R^2 are 0.28 and 0.61, but Value Line gives an Earnings Predictability score of 75.

Over the past decade, PTPM leads peer and industry averages while ranging from 22.6% in ’23 to 36.5% in ’16 with a last-5-year mean of 27.2%. ROE leads peer averages but trails the industry while ranging from 16.6% in ’23 to 29.6% in ’21 with a last-5-year mean of 21.9%. Debt-to-Capital is much lower than peer and industry averages despite increasing from 0% (through ’19) to 19.9% (’23) with a last-5-year mean of 17.1%.

Quick Ratio is 3.3 and Interest Coverage is 23.8 per M*, who assigns an “Exemplary” rating for Capital Allocation and “Narrow” Economic Moat. Value Line gives a B++ grade for Financial Strength.

With regard to sales growth:

• YF projects YOY 12.1% contraction and 0.9% growth for ’24 and ’25, respectively (based on 25 analysts).
• Zacks projects YOY 11.9% contraction and 1.4% growth for ’24 and ’25, respectively (8 analysts).
• Value Line projects 0.7% annualized contraction from ’23-’28.
• CFRA projects contraction of 12.7% YOY and 6.2% per year for ’24 and ’23-’25.
• M* offers a 2-year ACE of 6.0% contraction per year.

I am forecasting below the long-term estimate at 2.0% contraction per year.

With regard to EPS growth:

• MarketWatch projects annualized 12.9% contraction and 7.0% growth for ’23-’25 and ’23-’26 (based on 29 analysts).
• Nasdaq.com projects growth of 3.5% YOY and 14.4% per year for ’25 and ’24-’26 [7/7/1 analyst(s) for ’24/’25/’26].
• Seeking Alpha projects 4-year annualized growth of 9.7%.
• Argus projects 5-year annualized growth of 10.0%.
• YF projects YOY 26.6% contraction and 2.9% growth for ’24 and ’25 and 5-year annualized growth of 15.0% (26).
• Zacks projects YOY 26.6% contraction and 2.1% growth for ’24 and ’25 and 5-year annualized growth of 4.1% (8).
• Value Line projects 2.4% annualized contraction from ’23-’28.
• CFRA projects contraction of 26.6% YOY and 12.5% per year for ’24 and ’23-’25 along with 3-year CAGR of 5.0%.
• M* projects long-term growth of 6.7% per year.

My forecast of 2.0% per year is less than all but one long-term estimate (mean of six: 7.2%). Initial value is ’23 EPS of $6.13/share rather than 2024 Q3 EPS of $4.85 (annualized). While possibly aggressive, I think the business cycle may be close to a nadir for this cyclical industry.

My Forecast High P/E is 19.0. Over the past decade, high P/E ranges from 17.1 in ’16 to 32.1 in ’20 with a last-5-year mean of 23.3 and a last-5-year-mean average P/E of 18.1. I am near bottom of the high P/E range (only ’16 is less).

My Forecast Low P/E is 10.0. Over the past decade, low P/E ranges from 9.8 in ’14 to 16.6 in ’18 with a last-5-year mean of 12.9. I am forecasting near bottom of the range (only ’14 is less).

My Low Stock Price Forecast (LSPF) is $68.00. Default ($61.30) based on initial value from above seems unreasonably low at 37.0% (28.0%) less than the previous close (52-week low). My (arbitrary) forecast is 30.0% and 20.0% less, respectively.

These inputs land SWKS in the HOLD zone with a U/D ratio of 1.1. Total Annualized Return (TAR) is 6.3%.

Over the past decade, Payout Ratio (PR) increases from 9.2% (’14) to 41.4% (’23) with a last-5-year mean of 32.8%. I am forecasting near bottom of the range at 10.0%.

PAR (using Forecast Average—not High—P/E) is less than I seek for any size company at 0.9%. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 81 studies (my study and 46 other outliers excluded) over the past 90 days, averages (lesser of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 2.0%, 7.0%, 21.0, 12.9, and 31.2% respectively. I am lower across the board. Value Line projects an average annual P/E of 25.0 that is greater than MS (17.0) and much greater than mine (14.5).

MS high / low EPS are $7.44 / $5.32 versus my $6.77 / $6.13 (per share). My high EPS is less due to a lower growth rate. Value Line’s $7.55 is just higher than both.

MS Low Stock Price Forecast (LSPF) of $74.80 implies Forecast Low P/E of 14.1: greater than the above-stated 12.9. MS LSPF is 9.0% greater than the default $5.32/share * 12.9 = $68.63 resulting in more aggressive zoning. MS LSPF is also 10.0% greater than mine.

With regard to valuation, PEG is 4.1 and 9.8 per Zacks and my projected P/E, respectively: both extremely high [due to low growth estimates]. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly elevated at 1.1.

MOS is robust because my inputs are near or below respective analyst/historical ranges and MS averages. This is further supported by an MS TAR (9.8%) that is 350 basis points greater than mine.

Like every cyclical company I have studied thus far, visual inspection is weak.

I chose to do this stock study regardless largely due to apparent inconsistency in the Value Line analysis. 5-year annualized high and low stock projections are impressive despite concomitant projection of long-term EPS contraction. Part of what allows this to happen is a future average annual P/E that is [inexplicably] higher than any seen from 2008 – 2023. Revenue is also projected to contract. How does it make sense for stock price to appreciate significaintly in the face of declining revenue and EPS over the next five years?

Per U/D, SWKS is a BUY < $83. Given a forecast high price of $128.60, 128.6 * (((1 – (15.0 – 0.9) / 100)) ^ 5) ~ $60/share meets the BI TAR criterion.

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