Are You Watching This Trend at MIPS Technologies?

Margins matter. The more MIPS Technologies (Nasdaq: MIPS  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong MIPS Technologies's competitive position could be.

Here's the current margin snapshot for MIPS Technologies and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 MIPS Technologies

98.1%

30.4%

26.1%

 ARM Holdings (Nasdaq: ARMH  )

93.9%

25.6%

20.4%

 Skyworks Solutions (Nasdaq: SWKS  )

43.3%

20.1%

14.6%

 Rambus (Nasdaq: RMBS  )

96.3%

10.5%

(1.9%)

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where MIPS Technologies has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months (TTM), the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for MIPS Technologies over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 99% and averaged 98.3%. Operating margin peaked at 30.6% and averaged 15.6%. Net margin peaked at 18.1% and averaged (28.5%).
  • TTM gross margin is 98.1%, 20 basis points worse than the five-year average. TTM operating margin is 30.4%, 1,480 basis points better than the five-year average. TTM net margin is 26.1%, 5,460 basis points better than the five-year average.

With recent TTM margins all exceeding historical averages, MIPS Technologies looks like it is doing great.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at MIPS Technologies? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

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  • Report this Comment On April 28, 2011, at 7:40 PM, exchode wrote:

    So I'm taking it that most of these EPS and FY target prices are based off of speculation of what MIPS *could* be intending to do with those retained earnings, rather than historically what they *have* done with them. In the other article here, the author mentioned that MIPS is still jetting most of its revenue from royalties existing since 3 years ago... Hopefully we don't see MIPS turn into an AMD where a big chunk of earnings are turned into R&D only to not produce results impressive enough to increase the value of the stock.

    I suppose in the long run, those retained earnings and interest turned into capital for further R&D should turn into greater profits...who thinks our 52-week high is still hopeful at ~$15.00?

  • Report this Comment On April 29, 2011, at 9:57 AM, Blizzardlover wrote:

    98.1% gross margin? Maybe MIPS prices are too high? Maybe reducing price would increase sales.

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Related Tickers

12/31/1969 7:00 PM
MIPS.DL $0.00 Down +0.00 +0.00%
MIPS Technologies,… CAPS Rating: ***
ARMH $43.51 Up +0.98 +2.30%
ARM Holdings CAPS Rating: **
RMBS $11.96 Down -0.13 -1.08%
Rambus, Inc. CAPS Rating: *
SWKS $52.17 Up +0.03 +0.06%
Skyworks Solutions… CAPS Rating: ****

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