At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best...
Top-10%-ranked investment banker UBS gave top honors to Skyworks Solutions (Nasdaq: SWKS ) last week. Fresh from a meeting with management, Skyworks rushed to hike its price target on the mobile communications chip maker Friday, giving the stock an 18% boost to target price, and reiterating its buy rating.
What was it that got UBS so convinced that Skyworks is shooting skyward? I'll give it to you verbatim, courtesy of the good folks at StreetInsider.com, who gave us the skinny on the upgrade:
- "SWKS should gain additional content in Apple's [ (Nasdaq: AAPL ) ] new platforms including New iPad & iPhone5."
- Also, "SWKS is gaining share at Samsung with its new MMPA for Intel [ (Nasdaq: INTC ) ] baseband."
- And finally, "SWKS will address incremental content of about $2.50/device for WiFi PA (from SiGe), antenna switch module and GPS LNA."
So... "MMPAs," "WiFi PAs," and "GPS LNAs." Oh my! That's an awful lot of techno jargon, even for a Wall Street analyst. So let's see if we can make this a little easier to understand. The buy thesis for Skyworks basically breaks down into three parts:
First, the company makes semiconductor widgets that help 21st -century smartphones and tablets do their thing. Second, more people are buying smartphones and tablets these days. Indeed, there are perhaps 100 million smartphones in use in the U.S. today. ComScore tells us this is out of 234 million mobile phones, and Nielsen says "penetration" of the market in the U.S. -- i.e., the number of actual smartphone users divided by the potential market -- has now reached 48%.
This all suggests serious growth in sales. And third, as UBS now explains, Skyworks is winning more and more business from the two most popular makers of smartphones -- Apple and Samsung.
Sound good so far? It gets better.
Skyworks' success in tagging along with industry heavyweights Apple, Samsung, and Intel lends credence to consensus analyst estimates of 15.5% long-term earnings growth at Skyworks. Indeed, if UBS is to be believed, the company might be able to do even better than that.
But even if all Skyworks manages to accomplish is what Wall Street expects of it, the stock already looks slightly undervalued today. Valued at roughly $5 billion (but with net cash of more than $225 million, dropping its enterprise value down to just $4.6 billion), Skyworks today is priced at an enterprise value-to-free cash flow ratio of 15.1. That's a pretty cheap price to pay for 15.5% growth, and an even cheaper price if UBS turns out to be right about Skyworks growing faster than expected.
Foolish final thought
What's more, whatever you think of Skyworks, the stock's an undeniable bargain relative to the alternatives. The shares trade for a 35% discount to the 34 P/E ratio at popular RF Micro Devices (Nasdaq: RFMD ) , despite the fact that Skyworks is pegged for a faster growth rate. And Skyworks' shares' undervaluation is even more obvious when compared to archrival TriQuint Semiconductor (Nasdaq: TQNT ) .
Indeed, the contrast between these two companies is just night-and-day. Skyworks trades for almost identical multiples to earnings, as does TriQuint -- 22.3 times last year's earnings, and 13 times next year's. Yet Skyworks is expected to grow more than twice as fast as TriQuint, and Skyworks is generating gobs of free cash flow, whereas TriQuint is actually burning cash.
After crunching the numbers, I know which of these three mobile chipmakers I would buy. And I'm prepared to put my reputation where my mouth is -- and publicly recommend Skyworks stock on Motley Fool CAPS today. Care to see how the bet works out? Follow along (and feel free to jeer if I'm wrong).
Who else do we think will outperform the market... by taking over the mobile computing market? Read our new report on The Next Trillion-Dollar Revolution, and find out.