Msf 8640 - Skyworks Solutions Valuation

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of equity for Skyworks is 9.165%. The terminal growth rate was considered to be 2.5%. Using these metrics and the Free Cash Flow calculation our target price of Skyworks stock is $114.21 (Appendix XVI). Our target is consistent with street estimates of $115-$122. Sensitivity Analysis (Appendix XVII) displays how Skyworks’s target stock price is going to be affected by changes in WACC and terminal growth rate. The target stock price in the worst case scenario of low growth and high cost of capital is $105.79.

The Relative Valuation of Skyworks Solutions displays that the stock is currently undervalued compared to its peers (Appendix XVIII). Our target price calculated using EBIT multiples of Skyworks’s competitors is $162.93 which is higher than our DCF valuation of Skyworks’s target price. The current Price to Earnings (PE) ratio is 20.78 which compare favorably with its competitors Maxim Integrated Products, Qorvo and Analog Devices (Appendix XIX). Since Skyworks does not have any debt on its balance sheet the Enterprise Value to EBITDA (EV/EBITDA) ratio is a better indicator of Skyworks’s value relative to its peers. The current EV/EBITDA ratio is 12.64 (Appendix XX). The EV/EBITDA ratio also displays that the stock is currently undervalued relative to its peers. The reason for this current discounted market price is primarily due to demand related fears from Chinese markets, cyclical nature of semiconductor industry and impending maturity of smartphone market. Moreover Skyworks introduced a dividend and stock buyback program in September 2014 which will further attract fixed income investors leading to an increase in demand for the stock. Current dividend yield on Skyworks’s stock is 1.23%. Firm currently pays an annual dividend of $1.04 and their current payout ratio is 18%.

Recommendation

We recommend Skyworks Solutions, Inc. to be a strong buy. Skyworks has been diversifying its revenue stream away from Apple and Samsung by adding Chinese smartphone manufacturers like Xiaomi and Huawei to its portfolio. Skyworks’s entry in the Internet of Things (IOT) markets will further diversify its revenue stream. Recent stock correction since June 2015 suggests a bottom. An impending increase in Federal Funds Rate suggests an improving economy, which is a good sign for smartphone and tablets industry. Skyworks has been displaying high revenue growth, reliable capital structure and strong return on equity and assets. We bought Skyworks Solutions Inc. stock on October 27, 2015 at the price of $76.31 per share. Given our target price of $114.21 we expect a return on our investment in the range of 45% to 50% over next one year.

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Appendix

Appendix I (Source – Skyworks Solutions Inc. Investor Relations)

20.00%

20.00%

60.00%FY 2011

Broad Markets

Integrated Mobile Systems

Power Amplifiers

26.00%

36.00%

38.00%FY 2014

Broad Markets

Integrated Mobile Systems

Power Amplifiers

Profit Margin

Long-Term Growth

Broad Markets

50%

20%

Integrated Mobile Systems

50%

15%-20%

Power Amplifiers

40%-45%

5%

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Porter’s Five Forces

Appendix II (Data Source – Bloomberg)

Profitability Ratios

Appendix III (Data Source – FactSet)

0.00

5.00

10.00

15.00

20.00

25.00

30.00Return on Assets

SWKS

S&P 500/ Semiconductors & Semiconductors Industry

S&P 500

5

Appendix IV (Data Source – FactSet)

Appendix V (Data Source – FactSet)

0.00

5.00

10.00

15.00

20.00

25.00

30.00Return on Equity

SWKS

S&P 500/ Semiconductors & Semiconductors Equipment

S&P 500

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00Operating Margin

SWKS

S&P 500/ Semiconductors & Semiconductors Equipment

S&P 500

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Growth Ratios

Appendix VI (Data Source – FactSet)

Appendix VII (Data Source – FactSet)

Appendix VIII (Data Source – FactSet)

-20.00%

0.00%

20.00%

40.00%

60.00%

2006

2007

2008

2009

2010

2011

2012

2013