A Chipmaker David Einhorn is Bullish About

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Marvell Technology Group (NASDAQ: MRVL) recently issued its Q3 business outlook last Thursday. As the overall PC industry weakened, demand for its HDD storage decreased, and the company had to lower its Q3 guidance. It expected Q3 revenue to be in the range of $765 - $785 million, much lower than its prior guidance range of $800 - $850 million, whereas Wall Street expected its revenue to be $813.4 million. 

That was not all bad news for Marvell’s investors. Clyde Hoseinhas, its CFO resigned after 4 years with the company. The lower guidance and CFO resignation have been detrimental to its stock price. The share price plunged 14.3% from $8.83 to $7.57. Actually, Marvell’s share price has experienced a continuous decrease, from $16.4 in Feb. 2012. Year-to-date, it has lost 46% of its value in the stock market. 

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Marvell is operating in three main business segments: Mobile and Wireless, Storage, and Networking. Its main revenue contribution has been from Storage segment, 46% in fiscal 2011. It has significant customer concentration. In 2009, 24% of revenue came from Western Digital, 15% came from Toshiba. In 2011, 21% came from WDC and 14% of revenue was from Research in Motion. And in the recent year, 19% of its sales came from WDC. With significant revenue contribution coming from Marvell's storage business, the weak PC industry has hit its revenue hard.  

The company has a quite strong balance sheet. As of July 2012, it had $2.13 billion cash, no debt, and $4.8 billion stockholders’ equity. However, it had $2 billion goodwill. Its tangible book value $4.90 per share. So at $7.57 per share, the market is valuing Marvell at 9.7x P/E and 0.9x P/B. It was much lower than its historical average with P/E at 34.4x and P/B at 2.1x. 

David Einhorn, a quite successful billionaire hedge fund manager, has been a net buyer of Marvell for a while. As of July 2012, his fund owned 29.6 million shares, equivalent to more than 5.3% of the company. He liked the fact that the company has been repurchasing shares very intensively. And the more the price dropped, the more he bought in to increase his fund’s stake in the company. He wrote in his Q2 letter: “Marvell Technology Group (MRVL) was the other significant loser, as its shares fell from $15.73 to $11.28 during the quarter.  MRVL gave tepid guidance and Wall Street has modestly reduced its estimates of earnings per share from $1.25 to $1.15 this year and from $1.45 to $1.40 for next year.  MRVL has about $4 per share in cash and now trades at roughly 5x next year’s earnings net of the cash on the balance sheet.  Most of the cash is excess, and the company has commenced what we hope will be an aggressive share repurchase program. We have used the reduced stock price as an opportunity to increase our stake in the company.” 

Compared to its peers including LSI Corporation (NASDAQ: LSI), STMicroelectronics (NYSE: STM) and Texas Instruments (NASDAQ: TXN), Marvell seems to the least expensive company among the four. Its P/E is 9.7x, whereas LSI is at 11.1x, STM is producing losses so P/E is not valid and TXN is valued at 15.4x. Its current operating margin and net margin is highest, however, its ROE of 10.6% is much less than LSI’s of 28.7% and TXN’s of 18.8%. Indeed, year-to-date share price has much underperformed its peers.

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My Foolish take

With a 2.7% dividend yield, strong balance sheet, low valuation, highest margin, and the confidence of David Einhorn for the stock, Marvell seems to be a good choice for investors. However, as the overall PC industry has been weakened over time, its share price would not expect to bounce back soon. Investors should be patient and unemotional with large price declines. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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