Skyworks Solutions (SWKS) Stock: An Undervalued Chipmaker

PUBLISHED Nov 18, 2022, 8:24:56 PM        SHARE

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Over the past five weeks, the market has been up 14.7%. Also, after the CPI report was issued last Thursday morning, the market and almost all the stocks had a tremendous run-up. In two days, the market is up nearly 7%. The rise could be a dead cat bounce, but it may have staying power because inflation is seemingly tapering. That’s an incredible move in such a short time frame. For example, the market can go a whole year and only be up 7%. However, there are still undervalued stocks and near COVID-19 lows in March 2020. For example, Skyworks Solutions (SWKS) is one stock I have been buying as it hit a support level of around $80.

The chart below shows that the $70 – $80 level was once a support level. That is why I bought more shares in the low $80s. The stock is now at $92.35 per share. However, SWKS is still undervalued at current levels. In addition, the dividend yield is 2.6%, which is attractive for a company like SWKS. The company has been increasing its dividend by over 10% per year. Next, we will discuss more details about the company and the amount of undervaluation.

SKWS Price Chart

Source: TradingView

Skyworks SWKS stock

Skyworks Solutions (SWKS) Stock: An Undervalued Chipmaker

Overview of Skyworks Solutions

Skyworks Solutions is an American semiconductor company headquartered in Irvine, California, United States. Skyworks manufactures semiconductors in Radio Frequency (RF) and mobile communications systems. Its products include power amplifiers, front-end modules, and RF products for handsets and wireless infrastructure equipment. The company’s portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, etc.

SWKS was down 53% since its high in April 2021. The main driver of the stock price decrease has nothing to do with the company itself. The price was run up fast in a short time. Also, the overall market has gone down, and all chipmakers are having issues because of supply chain issues.

SWKS’ current stock price of $96.35 (as of this writing) is right near the lower end of the 52-week range of between $72.16 and $165.79 per share. Thus, SWKS seems like a stock in the right place to buy up shares where both the 52-week range and support line meet.

Skyworks Overview

Source: Skyworks Investor Relations

Skyworks Solutions (SWKS) Stock Price and Fundamentals

Stock Price $96.54
Market Capitalization $15.49 B
PE Ratio 10.86X
Dividend Rate (FWD) $2.48
Dividend Yield (FWD) 2.57%
Payout Ratio (FWD) 20.2%
Source: Portfolio Insight* (as of November 16, 2022)

SKWS Stock Chart

Source: Stock Rover*

Earnings Estimates

For first quarter fiscal year 2023, Skyworks Solutions expects revenue of $1.30 billion and $1.35 billion with non-GAAP diluted earnings per share of at $2.59 at the midpoint of the revenue range.

Consensus forward is $9.84 per share for fiscal year 2023, down from $11.24 per share in FY 2022.

SWKS Dividend History, Growth, and Yield

We will now look at SWKS’s dividend history, growth, and yield. We will then determine if it’s still a good buy at current prices.

SWKS is considered a Dividend Challenger, a company that has increased its dividend for more than five years. In this case, SWKS has increased its dividend for eight straight years. SWKS’s most recent dividend increase was 11%, announced in August 2022.

Dividend Growth

Additionally, according to Portfolio Insight*, SWKS has a five-year dividend growth rate of about 14.7%, which is excellent considering how fast inflation increased last year and this year. Over the past three years, the growth rate has been 13.3%.

Portfolio Insight - Dividend Growth SWKS

Source: Portfolio Insight*

Something essential to note is that SWKS continued to pay its dividend during the most challenging period in the last 100 years. Many businesses and industries cut or suspended their dividend payments during the COVID-19 pandemic. However, SWKS continued to pay out its dividend and increased them. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.

Dividend Yield

The company has an excellent dividend yield of approximately 2.6%, which is more than double the average dividend yield of the S&P 500 Index. This dividend yield is a respectable initial yield for dividend growth-driven investors. This dividend yield is also suitable for investors leaving the bond market looking for higher yields. Although, it may not be an excellent stock for income-driven investors who want a 4.5% yield or higher. However, with the company’s increasing dividend rate, I can see over a 5% yield on cost (YOC) in the next 5 to 7 years.

Portfolio Insight - Dividend Yield History SWKS

Source: Portfolio Insight*

SWKS’s current dividend yield is higher than its own 5-year average dividend yield of 1.6%. I like to look at this metric because it gives me a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. Stock price and dividend yield are inversely related. If the stock price increases, the dividend yield decreases, and vice versa.

Dividend Safety

Let’s determine if the current dividend is safe. This metric is critical to look at as a dividend growth investor. Undervalued dividend stocks sometimes present a “value trap,” and the stock price can continue to decline.

We must look at two critical metrics to determine if the dividend payments are safe yearly. The first one is earnings per share (EPS), and then we must look into Free Cash Flow (FCF) per share or Operating Cash Flow (OCF).

Analysts predict that SWKS will earn an EPS of about $9.92 per share for the fiscal year (FY) 2022. Analysts are 43% accurate when predicting SWKS’s future EPS. Also, the company beats these estimates 36% of the time. In addition, the company is expected to pay out $2.48 per share in dividends for the entire year. These numbers give us a payout ratio of approximately 25% based on EPS, a conservative value, leaving the company with much room to continue to grow its dividend.

I am excited by having a 50% or lower dividend coverage with a dividend yield of 2.6% for future growth. This point will allow the company to continue to grow its dividend at a high rate, as it has been doing for the past five years, without sacrificing dividend safety. In addition, SWKS has a dividend payout ratio of 18.5% on an FCF basis. Thus, the dividend is well covered in both EPS and FCF.

SWKS Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well SWKS performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

SWKS revenues have grown significantly at a compound annual growth rate (CAGR) of about 14% for the past ten years. Net income, however, did much better with a CAGR of ~25% over the same ten-year period.

Furthermore, according to Portfolio Insight*, EPS has grown 19.45% CAGR annually for the past ten years and at 11.75% CAGR over the past five years.

Portfolio Insight - Earnings per Share SWKS

Source: Portfolio Insight*

Since revenue, net income, and EPS did have good growth over the years, is this stock attractive based on its valuation and dividend yield? We will talk about the company’s valuation later in this article. In the meantime, analysts predict that the company will grow EPS at a 13% rate over the next five years.

Last year’s EPS increased from $10.50 per share in FY2021 to $11.24 per share in FY2022. This performance was an excellent growth year over year. Additionally, analysts expect SWKS to make an EPS of $9.92 per share for the fiscal year 2023, which would be a ~12% decrease compared to FY2022. I don’t particularly appreciate seeing that the following year’s earnings are expected to be lower than the prior year, but it is still much higher than 2019 and 2020.

The company has a solid balance sheet. SWKS does not have an S&P Global credit rating. But, the company has a debt-to-equity ratio of 0.5, which is an outstanding ratio. It also has an interest coverage ratio of 31.8. Thus, the company has a stable balance sheet to overcome significant economic downturns like the COVID-19 pandemic last two years, adding to the dividend safety.

However, there are still risks with an investment in SWKS. For example, if there is a recession, this can continue to bring the stock price lower as it did in the Great Recession and during the COVID-19 pandemic, which saw prices decrease 88.7% and 95.1%, respectively. Also, the Semiconductor industry is very cyclical. Also, SWKS’s biggest customer is Apple, so if Apple decides to stop doing business with SWKS, that will hurt the company significantly.

SWKS Competitive Advantage

SWKS is an RF leader with years, if not decades, of RF expertise in design and chip manufacturing, packaging, and testing, which is especially valuable since most RF products are based on more specialized materials. This will be very difficult for many others to replicate, and Skyworks has reaped the rewards with healthy profitability and earnings growth.

SWKS Valuation

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Lastly, I like to use the Gordon Growth Model and variation of the Dividend Discount Model (DDM). I use a DDM analysis because a business ultimately equals the sum of the future cash flow that that business can provide.

Let’s first look at the P/E ratio. Skyworks stock has a P/E ratio of ~8.7x based on FY 2023 EPS of $9.92 per share. The P/E multiple is excellent compared to the past 5-year PE average of 13.7x. If SWKS were to vert back to a P/E of 13.7X, we would obtain a price of $135.90 per share.

Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is 2.6%. There is good upside potential as SWKS’s 5-year dividend yield average is ~1.6%. For example, if SWKS stock were to return to its dividend yield 5-year average, the price target would be $155.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 8%. I use a 10% discount rate because of the higher-than-normal current dividend yield. In addition, the projected dividend growth rate is conservative and lower than its past 5-year average. These assumptions give a fair price target of approximately $133.92 per share.

If we average the three fair price targets of $135.90, $155, and $133.92, we obtain a reasonable, fair price of $141.60 per share, giving SWKS a possible upside of 46.96% from the current $96.35 share price.

Conclusion on Skyworks Solutions (SWKS) Stock: An Undervalued Chipmaker

Skyworks Solutions (SWKS) is a high-quality company and stock that should meet most investors’ requirements. The company has a market-beating 2.6% yield and a long-term dividend growth history. Past earnings growth has been excellent. However, past performance may be different in the future. However, I am betting that SWKS will do well. That is why I own shares and have been buying at this level.

Disclosure: Long SWKS

Thanks for reading Skyworks Solutions (SWKS) Stock: An Undervalued Chipmaker.

You can also read Federal Realty (FRT): A Dividend King REIT by the same author.

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