More Bullish Sentiment for This Chipmaker in 2013

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Marvell Technology (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 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 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 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 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 (NASDAQ: LSI) and STMicroelectronics (NYSE: STM), Marvell 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, 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.

The joint-venture losses have been a major drag on STMicroelectronics’ consolidated net income. The company expects to incur around $350 million to 450 million in cash cost from the joint-venture shutdown and the business restructuring. Indeed, STMicroelectronics seems to be a good turnaround play for investors on the joint venture shutdown.

Income investors might like STMicroelectronics the most with its juicy dividend yield of 3.60%. Marvell ranked second, offering shareholders dividends with a yield of 2.10%. LSI does not pay investors any dividend. Marvell is the most profitable company with the highest operating margin of 9.54%, while the operating margins of LSI stayed at 7.64%. STMicroelecronics had a negative operating margin of 7.15%.

My Foolish take

Among the three, I still like Marvell the most with its decent dividend yield, the highest operating margin, and a reasonable valuation. With the earnings results that beat estimates, and the outlook upbeat, Marvell could continue to march higher in 2013.

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Anh HOANG long 2014 $10 calls on Marvell Technology. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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