Hedge fund manager David Einhorn has been bullish on Marvell Technology Group Ltd. (NASDAQ:MRVL), increasing his stake in the company from 16.6 million shares in the third quarter of 2011 to more than 51.8 million shares. As of December 2012, Marvell became his fourth biggest position, accounting for 5.9% of his total portfolio. However, Marvell has just reported depressing full year 2013 earnings results. Both the revenue and net income experienced significant declines from fiscal year 2012. Should investors follow David Einhorn into Marvell? Let’s find out.
A Declining Year is No Worry
In the fiscal year ended February 2013, Marvell Technology Group Ltd. (NASDAQ:MRVL) recorded $3.17 billion in revenue, a 7% decline from fiscal year 2012. The net income experienced a huge decrease of 50% to only $304 million, or $0.54 per share. Over the past several years, the company has been buying back a significant amount of its shares outstanding. The company reported that it had retired around 184 million shares, or about 27% of the total outstanding shares in the past 10 quarters. Since the fourth quarter of 2011, Marvell has returned about $2.5 billion in total to shareholders in the forms of both share repurchase and dividends.
A Low Probability Fine
At the end of 2012, a federal court fined Marvell as much as $1.17 billion due to the infringement of two patents that belonged to Carnegie Mellon University. However, David Einhorn strongly believed that the fine could be substantially reduced or eliminated. In the fourth quarter letter to shareholders, he wrote: “There are many grounds, but one of the simplest is that most of the damages were awarded based on foreign sales that are generally not protected by U.S. Patents. The jury found that since the product was “designed and tested” in the U.S., damages were payable even though the manufacturing and sales happened abroad.” Indeed, all of Marvell’s products are manufactured outside of the US. The company’s primary assembly and test subcontractors were in the Pacific Rim region. In addition, the majority of its sales, around 88% of the total revenue, were generated from customers in Asia.
In terms of the capital structure, Marvell still had quite a strong, liquid balance sheet. As of February 2013, Marvell recorded $4.48 billion in total stockholders’ equity, $1.92 billion in cash and short-term investments, and no debt. With the current trading price of $9.50 per share, Marvell is worth nearly $5.1 billion on the market. Because of the huge cash on hand, the enterprise value is much smaller--nearly $3.2 billion. The market is valuing Marvell at around 6.46 times EV/EBITDA. Compared to its two peers STMicroelectronics N.V. (ADR) (NYSE:STM) and LSI Corp (NASDAQ:LSI), Marvell seems to be moderately priced. LSI is the smallest corporation among the three, with only $3.84 billion in total market cap. With its current trading price of $6.95 per share, LSI is valued the cheapest, at 5.34 times EV/EBITDA. STMicroelectronics, with a total market cap of $7.1 billion, has the highest valuation at 13.6 times EV multiple. Among the three, LSI enjoyed the highest operating margin at 17%, while Marvell generated 9.3% in operating margin. STMicroelectronics generated a negative operating margin of -8% over the past 12 months.
Foolish Bottom Line
With a terrific record of returning cash to shareholders, a decent operating margin, and a low valuation, I personally think Marvell’s share price might head much higher in 2013.
The article Marvell Will Head Higher in 2013 originally appeared on Fool.com and is written by Anh HOANG.
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