A Bargain in the Semiconductor Sector

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Marvell Technology (NASDAQ: MRVL) produces semiconductor products for the storage, mobile, and networking industries.  Shares of the company have done well lately along with most of the rest of the market, however shares are still well below where they were just a few years ago.  In fact, the current share price is about half of its 2012 peak.

When a company like this trades inversely to the rest of the market, a few obvious questions come to mind.  Most importantly, is this stock a bargain at the current price?  A lot of the time, companies that have fallen out of favor due to a bad few years can produce some of the best long-term buying opportunities, so let’s see if that is the case here.

About Marvell

As mentioned, Marvell produces its products in three different segments.  First, the Storage segment is the largest and accounts for about 44% of the company’s revenues.  This segment produces integrated circuit (IC) solutions for storage device manufacturers such as Seagate, Western Digital, and many other household names.  This segment competes with other major semiconductor manufacturers like STMicroelectronics (NYSE: STM), which we’ll examine as a possible alternative to see how cheap Marvell really is.

The Mobile and Wireless segment contributes 26% of the company’s revenue and mainly makes ICs for handsets and tablets for companies like China Mobile and BlackBerry.  The biggest threat to the mobile segment is Qualcomm (NASDAQ: QCOM), however the company could benefit greatly if BlackBerry is successful in its turnaround.  If BlackBerry is able to recapture significant market share, it could do for Marvell what companies like Samsung and LG do for Qualcomm’s bottom line.

The rest of the Marvell’s revenue comes from the Networking segment includes products for such networking equipment producers as Cisco and Brocade Communications. 

The Numbers

So are shares of Marvell really that cheap right now?  Well, on a P/E basis, they are not.  Marvell earned 56 cents per share last year, which means that shares trade for about 20 times earnings.  However, this number is deceiving for a couple of reasons.

First, the company is projected to grow its earnings to 78 cents this year, and $0.90 and $1.11 per share in 2014 and 2015, respectively.  So, when you consider that Marvell trades at less than 10 times 2015’s consensus earnings, things look a lot better.  Additionally, and more importantly, out of Marvell’s $5.5 billion market cap, over $1.9 billion of it is in cash.  The company also has absolutely no long-term debt on its balance sheet.  When you back out the cash, shares are trading for just 12.8 times TTM earnings, which sounds pretty nice to me considering the kind of growth that is being projected. 

However, bear in mind that with increased potential return comes extra risk.  Marvell is a relatively small player in an industry that can be very cyclical and very sensitive to what’s going on in its end markets.

The Alternatives

Before we go diving in to Marvell, let’s see if any of its larger rivals would make a better addition to our portfolios.  As mentioned before, Marvell competes with companies such as Qualcomm and STMicroelectronics, so let’s take a look at those.

Qualcomm is a much larger company than Marvell, with a market cap of around $115 billion.  The company develops technology equipment using its advanced broadband technology, and makes a lot of its money from licensing and royalty fees.  Qualcomm trades at 18.2 times TTM earnings, which is comparable to Marvell.  The consensus calls for a 12% forward earnings growth rate, and Qualcomm has a very nice net cash position (about $12.4 billion), although it is less than Marvell’s on a percentage of market cap basis.

STMicroelectronics, which is based in Switzerland, is more comparable in size and product offerings to Marvell, and it doesn’t look like a better value.  A P/E analysis is meaningless since the company lost money last year, and is expected to just break even for 2013.  Earnings are expected to rebound nicely to $0.69 and $0.93 per share in 2014 and 2015, respectively, but this company seems to be more of a possible turnaround story than a long-term investment prospect.

A Steal or a Trap?

Of the three companies mentioned here, Marvell certainly seems like a good deal, especially if they are able to deliver on the ambitious earnings numbers that are expected.  With all the makings of a stable long-term investment (decent dividend yield, lots of cash, growing revenues), I feel confident in calling Marvell a buy right here and now.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. 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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