A pullback today from $CXO after a pullback in $OIL prices. Not surprised. With the recent gains in the last days, it was bound to happen. On the positive side today, $DGE.L gains a nice 0.60% after further weakening of the $GBPUSD in recent days. Why is $JPM up by 1%? Maybe Warren Buffett $BRK.B buying?
SKYWORKS SOLUTIONS is a VALUE STOCK 📶
When we think of value stocks, we usually think of companies such as Coca Cola $KO or General motors $GM , companies which have been in existence for over a hundred years. What exactly is a value stock?
There is no exact definition of a value stock and Warren Buffett $BRK.B says that there is no such thing as a value and a growth stock. He takes growth into consideration when valuing any stock. For today, let's use Buffett's mentor's Benjamin Graham's definitions. A value stock should have the following characteristics:
1. Low P/E
2. Low P/B
3. A moat
4. Low Debt with a good credit rating
5. Pays a good dividend which have been increasing in recent years
Skyworks Solutions $SWKS is one of the suppliers of Apple $AAPL which is their main customers but they also supply to Samsung, Huawei, Google $GOOG , Microsoft $MSFT and Amazon $AMZN . What do they supply? Semiconductor chips which helps you connect to the network. Let's see if Skyworks Solutions $SWKS meets all these criteria
1. They have the low P/E of 14.26 which is lower than industry average and lower than historical average
2. P/B is higher than industry average but lower than historical average
3. The moat that they have is that most of the smartphones that are being sold in the world today have a chip made by Skyworks Solutions. This is the chip used to connect to the network. On every 4G chip, they make $18 while on 5G chips, they will make $25. Let's ignore 5G for today. Let's assume, 5G fails. Even then, Skyworks is a value stock. Of course, if 5G works(and it will), then Skyworks is more than just a value stock. It is also a growth stock.
There are two reasons why Skywork Solutions stocks have been falling recently: the trade war and the saturation of the smartphone market. The trade war affects them because it affects Apple and also because Huawei is their third largest customer. As far as the saturation of the smartphone market is concerned, we should not really worry about that. Smartphones are now a commodity everybody needs. People are not upgrading that fast but once your smartphone gets old or damaged, you need a new one even in the middle of a recession. It doesn't really matter if the smartphone is an iPhone or a cheaper phone, Skyworks is making the same amount of money. Therefore, we can assume that the rate of growth of the company with the current 4G chips(without 5G) is going to be around 2%, same as the growth rate of the US economy.
4. What about the debt of Skyworks Solutions? ZERO
This is one of the few companies without any long-term debt.
5. They have a dividend yield of 2.4% with a payout ratio of 29%. They can always increase dividends with the amount of cash that they have
Skyworks Solutions meet all the criteria of a value stock. Let's find the intrinsic value of the company. Free cash flow has been fluctuating around $1 billions in recent years. We assumed a growth of 2% annually. Let's use a discount rate of 10% and calculate the total free cash flow of the company form today to judgement day. This gives us an intrinsic value of around $12 billions. This is the same as the current market cap of the company. Hence, Skyworks Solutions is a value stock. Now, if we account for 5G. This is a totally different story.
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