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 ...
Christmas came early for shareholders of semiconductor specialist Silicon Motion Technology (Nasdaq: SIMO ) yesterday. Ace investment banker Deutsche Securities (ranked in the top 15% of investors, according to our CAPS stats), initiated coverage of the "fabless" chipmaker with a "buy" rating. In the process, it helped SiMo sidestep yesterday's market downdraft. But did SiMo deserve the rating? Did investors deserve the bump in stock price?
You be the judge.
Just the facts, ma'am
As reported on StreetInsider.com yesterday, Deutsche bases its buy rating on a belief that "Silicon Motion can deliver above market revenue growth through its strong position in flash controllers and LTE wireless solutions at Samsung Electronics ... [We] expect the company to continue to outperform its peers."
And who are these peers, and how are they performing? In flash controllers, we see Marvell (Nasdaq: MRVL ) and Micron (NYSE: MU ) -- and just like Deutsche says, they're both expected to grow more slowly than SiMo. Yahoo! Finance pegs Micron for 12% long-term earnings growth and Marvell for 14%. By way of comparison, most analysts appear to believe that SiMo can maintain a 20% average growth rate over the next five years. (Deutsche projects 27% growth in 2012, dropping to 12% in 2013).
In graphics generally, and mobile graphics in particular, Yahoo! names Advanced Micro Devices (NYSE: AMD ) and NVIDIA (Nasdaq: NVDA ) as SiMo's primary competitors. Analyst estimates call for sub-10% growth at AMD, and just under 16% long-term profits growth at NVIDIA. So once again, SiMo seems to have an edge.
So far, so good. But what about Silicon Image itself? Viewed alone, and not in comparison to its peers -- some of which are pretty good bargains in their own right -- does buying SiMo make sense?
Actually, yes, it does. Priced at 10 times earnings today, SiMo boasts "high quality of earnings," with H1 free cash flow of $25 million, suggesting a full-year cash-haul north of $50 million. That's right in line with "GAAP" trailing earnings of $54 million. If SiMo succeeds in growing these numbers 20% per year over the next five years, its 10 P/E ratio and 10.5 P/FCF ratio are both very cheap indeed.
On the other hand, it is worth pointing out that SiMo has not always been this successful. Free cash flow at the company has averaged closer to $30 million annually over the past five years. But even working off of this lower number, you can argue that Silicon Motion at 17.5 times average historical FCF isn't terribly expensive relative to 20% growth. And if you net out the firm's prodigious bank account, the enterprise value-to-free cash flow ratio on this one is a mere 13.5.
Silicon Motion may not be the highest quality semiconductor stock on the market today. (To find out who we think is the best bargain, read the Fool's new free report on the stock we think will win the next trillion-dollar revolution). Even so, any way I look at SiMo, the stock seems to me like a screaming bargain at today's prices. The only question is how loudly you think it's screaming.
(Well? How loudly do you think it's screaming? Make your vote heard -- on Motley Fool CAPS).