Is Skyworks Solutions Inc (SWKS) Destined for Greatness?

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Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let’s take a look at what Skyworks Solutions Inc (NASDAQ:SWKS)‘ recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you’re about to see tell Skyworks’ story, and we’ll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company’s become more efficient over time. Since profits may not always reported at a steady rate, we’ll also look at how much Skyworks’ free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Skyworks’ share price has kept pace with its earnings growth, that’s another good sign that its stock can move higher.

Is Skyworks managing its resources well? A company’s return on equity should be improving, and its debt-to-equity ratio declining, if it’s to earn our approval.

By the numbers
Now, let’s take a look at Skyworks’ key statistics:

SWKS Total Return Price Chart

SWKS Total Return Price data by YCharts.

Criteria 3-Year* Change Grade
Revenue growth > 30% 94.5% Pass
Improving profit margin 28.3% Pass
Free cash flow growth > Net income growth 57.7% vs. 112.7% Fail
Improving EPS 87.9% Pass
Stock growth (+ 15%) < EPS growth 69.2% vs. 87.9% Pass

Source: YCharts. *Period begins at end of Q3 2009.

SWKS Return on Equity Chart

SWKS Return on Equity data by YCharts.

Criteria 3-Year* Change Grade
Improving return on equity 23% Pass
Declining debt to equity (100%) Pass

Source: YCharts. *Period begins at end of Q3 2009.

How we got here and where we’re going
Skyworks pulls through with a strong six-out-of-seven performance, missing on its free cash flow growth comparison due to a drop that took place through 2012. From the looks of it, Skyworks can recover in 2013 and possibly become one of the rare companies to earn a perfect score. Let’s take a closer look at Skyworks’ major efforts for the recent past and the coming year to determine if it’s going to stay on the path to perfection.

Skyworks has had a rough ride through 2012. Its shares peaked right before the release of Apple Inc. (NASDAQ:AAPL)‘s iPhone 5, and with good cause — Apple is one of Skyworks’ biggest customers, and any decision out of Cupertino to add to or reduce the component-supply relationship will have an outsized effect on Skyworks’ fortunes. But, as shareholders have come to realize, even a successful Apple can be a drag, simply because sky-high expectations are baked into the deal now. Days after my colleague Sean Williams wrote about Skyworks’ 52-week peak, fellow Fool Anders Bylund had to step in and scratch his head over the bewildering drop that followed what seemed like an otherwise positive guidance update.

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