Source: Monolithic Power Systems
Monolithic Power Systems, (MPWR +4.63%) defied some of its other tech peers on February 4, when it released fourth quarter results that came in higher than analyst expectations, along with strong guidance for next quarter and a simultaneous announcement of a stock repurchase program. Shares traded up the next day on heavy volume, despite the rest of the tech market being in a sharp sell-off. Let's take a closer look at what drove the out-performance for Monolithic this year and if it merits a position in your portfolio.
Growth was found all around in 2015
Most investors may not know the name Monolithic, but its products are in all kinds of electronics we use every day. The company is a designer and maker of integrated circuits -- specifically high-performance power management chips. These chips help regulate, limit, and convert power in an array of electric devices from LCD displays, LED lights, consumer electronics like cell phones, and automobiles.
For the fourth quarter, ending December 31, 2015, Monolithic sold $86.9 million worth of chips, up nearly 15% compared to last year and more than the $85.9 million expected by analysts. Earnings-per-share similarly beat expectations, coming in at $0.51 (non-GAAP) compared to the $0.49 expected; this was a growth of nearly 19% year-over-year.
For the full year of 2015, organic revenue growth was 17.9%, and management was quick to point out that this far exceeded the industry growth rate of 1.9%, according to data from market researcher SIA. Monolithic divides its revenue into four different product groups, all of which grew in 2015.
The largest group is consumer, at 44% of revenue; it grew 18% in 2015 driven by battery management applications, home appliances, gaming, and LED lighting. Tied for second place, with around 20% of revenue each, were communications and industrial. Communications was only slightly up, but the industrial category put up the most impressive growth numbers of 35% year-over-year.
This was largely driven by automotive, as infotainment devices become more widespread in vehicles. It is especially nice to see automotive becoming a bigger part of Monolithic's portfolio, because once power chips gain a design slot in a vehicle, they tend to stay there longer before being replaced -- potentially by a competitor. Automotive applications have a much longer product cycle, only being redesigned every few years versus every six months for a smartphone!
Finally, storage and computing makes up the final product category at approximately 16% of revenues. Although the smallest category, it still managed to put up respectable growth numbers of 23% for the year, driven by the growth in cloud computing, high-end PC, and storage applications.
Not just growth, but a capital return kicker too
In conjunction with the earnings release, Monolithic also announced a new share repurchase program for 2016, authorizing the company to purchase up to $50 million in stock. The buyback program will be funded through available working capital, which in my opinion is preferable to issuing debt to fund the program. Since the company ended the year with $235 million in cash and short-term investments, the program shouldn't strain working capital, even if fully used.
This is in addition to the company's dividend -- currently Monolithic pays a $0.20 per share dividend, equating to a 1.4% yield. This isn't a huge dividend, but it is impressive to get both a decent return of capital along with such great growth numbers, two things that usually don't go together for small tech stocks.
Another announcement made on the conference call worth pointing out is a new market-stock-unit (MSU) program that raises the execution price for employee stock units to a range of approximately $71 to $95 per share for the next six years. This means the company's stock price must be in that range for certain stock compensation to be exercised, leading to better alignment of employee, management, and shareholder interests.
Growth AND capital returns? What's not to like?
One of the major risks to be aware of with Monolithic is the cyclical nature of the semiconductor and electronic component industry. There are a couple things that make Monolithic a little more resistant to the cycle, but certainly not immune.
First, because Monolithic makes "high-performance" chips, these tend to be more specialized and slightly less commoditized than lower-end chips. To be clear, Monolithic still faces the constant pressure of declining prices like other semiconductors, but the company does have higher margins than its peers. It has been able to increase margins from 52% in 2011 to 55% today, but this still isn't as high as its cyclical peak of 64% in 2005 and 2006. Second, a diversified product portfolio like Monolithic's also helps weather some of the ups and downs.
Finally, Monolithic doesn't appear to be very cheap with a sky-high trailing P/E ratio of 65; however, if we look out to 2017 earnings estimates, this P/E ratio comes down to a more reasonable 21 times. Given the cyclical nature of the industry, and the current valuation, there may be some risk investors could be getting in at the later stage of a cycle right now. Yet on a longer-term horizon Monolithic may deserve a closer look due to the recent out-performance and growth prospects ahead.
