Recently, Marvell Technology Group Ltd. (NASDAQ:MRVL) reported impressive earnings results, handily beating analysts’ estimates. Right after the announcement, its share price experienced a nice rise of nearly 7% to $12.05 per share in after hours-trading. Marvell Technology Group Ltd. (NASDAQ:MRVL) is in the portfolio of several famous investors including Joel Greenblatt, Whitney Tilson, David Einhorn, and Chuck Royce. Is Marvell Technology a good company for investors at the current price? Let’s find out.
A first quarter beating estimates
In the first quarter of 2014, Marvell Technology Group Ltd. (NASDAQ:MRVL) generated $734.4 million in revenue, 7.7% lower than its revenue of $796.3 million in the first quarter last year. Net income came in at $53.2 million, 43.7% lower than the net income of $94.5 million last year. However, EPS experienced a drop of 31%, from $0.16 in Q1 2013 to $0.11 this year. The lower percentage decline in the EPS was due to the active share buyback that Marvell Technology Group Ltd. (NASDAQ:MRVL) has done over the past twelve months. Its number of total outstanding shares has been reduced significantly, from 594.4 million to nearly 505.4 million. Excluding special items, non-GAAP EPS came in at $0.19 per share, beating analysts estimate of $0.14 per share.
According to Dr. Sehat Sutardja, the company’s Chairman and CEO, the good results were due to “better than normal seasonal demand and share gains in the storage the networking end markets.” For the second quarter, the company expects to generate $770 million to $810 million in revenue and non-GAAP EPS of $0.17 to $0.21.
Einhorn has been bullish on Marvell Technology Group Ltd. (NASDAQ:MRVL) for several years. He commented that investors had been focusing on the company’s prospects for gaining more market share in controllers for both flash memory and hard disk drives. He wrote: “The company should see significant fixed operating leverage in 2013, as it has been carrying the cost of the investments in these products without any corresponding revenue until now.” Moreover, the potential earnings leverage has been boosted by its aggressive share repurchases.
The highest operating margin and reasonable valuation
Compared to LSI and STMicroelectronics N.V. (ADR) (NYSE:STM), Marvell Technology Group Ltd. (NASDAQ:MRVL) is not expensively valued. Marvell, at $12.05 per share, is worth around $6 billion. The market values Marvell at around 9.1 times EV/EBITDA. LSI is trading at $7.10 per share with a total market cap of $3.9 billion. The market values LSI at a similar valuation of 9 times EV/EBITDA.
The biggest customer of LSI is Seagate Technology PLC (NASDAQ:STX), accounting for around 31% of the total revenue in 2012. Recently, LSI announced that it ranked second in the fast growing Enterprise PCIe flash adapter segment in the U.S., with over 40,000 Nytro flash adapter products being shipped in the first year. Gary Smerdon, Senior VP and GM of Accelerated Solutions Division commented: “LSI’s broad portfolio of PCIe flash adapter products allows us to uniquely address customer challenges across a wider range of datacenter workloads than the competition.”
STMicroelectronics is the most expensively valued of the trio. At $9.50 per share, it has a total market cap of around $8.4 billion. The market values the company at as expensive as 18 times EV/EBITDA. The company is in the process of closing its loss-making joint venture with Ericsson. Because of the intense competition from low cost players in Asia and more innovative European players, this joint venture has not generated any annual profits since its inception in 2008.