I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.
Next up: Skyworks Solutions (Nasdaq: SWKS). Is this maker of signal processors for mobile devices the real thing? Let's get to the numbers.
Foolish facts
|
Metric |
Skyworks Solutions |
|---|---|
|
CAPS stars (5 max) |
**** |
|
Total ratings |
521 |
|
Percent bulls |
93.5% |
|
Percent bears |
6.5% |
|
Bullish pitches |
65 out of 69 |
|
Highest rated peers |
Integrated Device Technology, DSP Group, Power Integrations |
Data current as of Sept. 25.
Much like its closest peer, RF Micro Devices (Nasdaq: RFMD), Skyworks gets plenty of support among Fools. And for good reason: Skyworks recently increased its fourth-quarter revenue guidance to $310 million from $300 million.
"Their key customers include Motorola (NYSE: MOT), Research In Motion, Siemens, LG Electronics and Broadcom. There is a great demand for Skyworks' expertise, and their sales should continue to grow," wrote Foolish investor HarryInBC in March.
Analysts see a growth story here, as well. According to Capital IQ, the Street is expecting 15% annual earnings improvement for the foreseeable future.
The elements of growth
|
Metric |
Last 12 Months |
2009 |
2008 |
|---|---|---|---|
|
Normalized net income growth |
104.1% |
(0.4%) |
42.1% |
|
Revenue growth |
22.3% |
(6.7%) |
15.9% |
|
Gross margin |
41.9% |
40.1% |
39.9% |
|
Receivables growth |
37.6% |
(21.6%) |
(12.3%) |
|
Shares outstanding |
177.7 million |
172.8 million |
165.6 million |
Source: Capital IQ, a division of Standard & Poor's.
Judging by this table, they have reason to be optimistic. Let's review:
- Normalized net income is rising right alongside revenue, exactly what we want to see in an emerging growth story.
- Gross margin is also rising consistently, another good sign and suggestive of Skyworks' increasing pricing power.
- If there's a problem here it's with shares outstanding. Management has authorized 12 million new shares in two years, diluting earlier owners by more than 7%. I'm willing to forgive this for two reasons. First, the dilution is due to common stock shelf registrations for funding growth. Second, management's record for increasing returns on capital suggests the dilution won't be for naught.
Competitor and peer checkup
|
Competitor |
Normalized Net Income Growth (3 yrs.) |
|---|---|
|
Avago Technologies (Nasdaq: AVGO) |
Not available |
|
Hittite Microwave (Nasdaq: HITT) |
8.6% |
|
Linear Technology (Nasdaq: LLTC) |
(4.2%) |
|
Maxim Integrated Products (Nasdaq: MXIM) |
3.2% |
|
RF Micro Devices |
15.1% |
|
Skyworks Solutions |
54.9% |
Source: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 25.
Here's where Skyworks really shines. Not only is it the best growth story among peers, but there isn't even a horse race. Also, recent growth (104.1%) is outpacing historical growth. Acceleration like this often foreshadows excellent stock returns, and Skyworks is already up 50% year-to-date.
Grade: Sustainable
My favorite stock stories are the ones where the growth opportunity is so big as to be largely undefined, and I think that's what we have with Skyworks and its communications chips for smartphones and related devices. I've rated the stock to outperform in my CAPS portfolio.
Now it's your turn to weigh in. Do you like Skyworks Solutions at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.
You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.
