At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and “initiating coverage at neutral.” Today, we’ll show you whether those bigwigs actually know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS to track the long-term performance of Wall Street’s best and worst.
Who’s hot, who’s not — in semiconductor stocks
Wading back into the semiconductor sector, NYC-based investment banker Oppenheimer made a bold call on Skyworks Solutions Inc (NASDAQ:SWKS) Tuesday, resuming coverage of the stock with an outperform rating. Oppy’s predictions on two other semi-players, in contrast, were more cautious, pegging RF Micro Devices, Inc. (NASDAQ:RFMD) to only “perform” in line with the rest of the market, and downgrading LED lighting specialist Cree, Inc. (NASDAQ:CREE) (LEDs are basically just little semiconductors that emit light) — also to “perform.”
Curiously, investors responded to the new ratings by bidding up all three stocks, both the one Oppy likes, and the two it doesn’t (particularly much). Was this the right call?
As it turns out, I happened to take a look at all three of these companies over the past month — and came away unimpressed with all of ’em. That said, I did point out that Cree, for example, was approaching a value at which it might become buyable, and that’s obviously true of all three stocks: At the right price, any one of them might be worth owning. So… let’s take a look at those prices.
If price were no object, I’d have to say Skyworks is probably my favorite business of the bunch. As Oppenheimer points out, it’s “the most diversified among [its] peers across OEMs and baseband partners,” and “best positioned to capitalize on the rising complexity of the RF front-end in next generation wireless devices.”
GAAP-profitable, Skyworks throws off even more free cash flow from its business than it’s allowed to report as “net earnings” under the usual accounting rules. Last year alone, free cash at the company came to $241 million, or about $30 million more than reported profit. And with so much cash coming in the door, it’s not surprising that Skyworks also boasts a pristine balance sheet, with more than $377.5 million in cash to its credit, and not a lick of debt.
So far, so good. But what about the price?
Valued on free cash flow, Skyworks sports a 19.5-times valuation — which drops below 18 once you “net out” the company’s cash. That’s not a bad price. At least Skyworks has free cash flow. Archrival TriQuint Semiconductor (NASDAQ:TQNT) does not, and is GAAP-unprofitable to boot, giving it price-to-earnings and price-to-free-cash-flow ratios of “infinity,” each. Still, with analysts projecting Skyworks will only grow profits at about 16% long-term, the stock’s still not quite cheap enough to buy.