Everything seems to be going right for this stock, which would usually make me nervous since something that seems to good to be true usually is, but that is not the case with this high-flyer. Business is booming and a slowdown isn’t anywhere on the horizon. By the looks of the fundamentals, this stock will be making a series of new highs down the road. Skyworks Solutions (SWKS) deserves a place in your portfolio.
Skyworks offers analog and mixed signal semiconductors worldwide. The company provides power amplifiers and front-end solutions for cellular devices from entry level to multimedia platforms and smart phones. Basically, it is involved in making the guts of all the high growth telecommunications devices of today.
Healthy Demand
In early November, the company reported excellent fiscal fourth-quarter earnings of 43 cents per share, above the 40 cents expected by analysts. Revenues also exceeded views by $4 million. Better yet, management guided higher for the next quarter, projecting earnings per share of 44 cents, three cents more than analysts had previously expected. What was the main reason? Skyworks said in its conference call that demand is terrific for its connectivity and broadband mobility products.
“Skyworks is capitalizing on consumers’ insatiable demand for always on connectivity, broadband mobility and access, as well as home automation applications,” said David J. Aldrich, president and chief executive officer. There you have it from the horse’s mouth. You have to love when the chief uses terms like “insatiable demand.”
Analysts as a group have increased this year’s earnings estimates by six cents over the past month to $1.46 per share and 14 cents for next year to $1.79 per share. The stock is undervalued based on its forward price/earnings ratio of 14.2, compared to its long-term growth rate of 15%. Management was able to grow its gross margins by a fat 290 basis points in the latest quarter.
These kinds of numbers warrant multiple expansion, which I think is inevitable given the current momentum. If investors accord a multiple of 18x to next year’s estimates, that would come to a price target of $32.22 compared to today’s quote of $25 and change. I love stocks that have room for increasing multiples combined with rising estimates. I think this is a $35 stock within 12-18 months.
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