Does Marvell Deserve to Rebound?

By Nikhil Shamapant - March 2, 2012 | Tickers: INTC, MRVL, QCOM, TXN | 0 Comments

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In my last post, I explored possible explanations for why Marvell Technology Group (NASDAQ: MRVL) has missed out so much on the tech rebound in recent weeks. With the SPDR S&P Semiconductor ETF up 17.37% since the beginning of the year, Marvell is only up 9.02%. The main explanation I explored in the previous post was that investor cash was pushing these companies up by market share, the logic being that if investors wanted to put cash into the Semiconductor Industry, they would put it into the bigger players first to get the most exposure to the industry. This being the case, I wasn't looking for perfect correlation, but I wanted at least some sign that Market Share and YTD performance were related for the industry's recent performance. I found no such relationship...so maybe the underperformance is more due to Marvell's lower quality earnings? Maybe while the rest of the industry is moving to fair value for their earnings, Marvell has already been judged to be at fair value for its earnings? We can figure this out by finding each company's fair value relative to each other and as independent entities, and comparing them to market prices.

 Marvell's Earnings: Is it Fairly Valued For The Future? 

It seems clear from the relative earnings ratios that Marvell isn't overvalued by a direct comparison to Texas Instruments or Qualcomm, but you have to compare more than just earnings. Texas Instruments and Qualcomm are powerhouses on the top of their niches, companies that might deserve a higher valuation ratio than Marvell. For evidence of how the market has been valuing these companies, take a look at this Earnings yield chart for Marvell Technology Group, Texas Instruments, Qualcomm, and Intel. Remember Earnings Yield is the reciprocal of the P/E ratio, the higher the earnings yield, the less investors are confident in the stability and growth power of the yield.

As you can see above, from 2002 to 2010, Marvell had always been seen as a growth company, especially in comparison to more mature companies in its industry like Intel, which consistently had an earnings yield of 5-10%. Of course, look closer and you see that Marvell's earnings yield was negative in some years, making it even more unstable than the other more mature investments. This is striking, however, as it shows how investors have started to group Marvell Technology Group with other semiconductor powerhouses as less of a growth company and more of a mature and fully grown company. While this may be true, Marvell as a mature company doesn't have the earnings power or resources to deserve a valuation as high as Qualcomm or Intel. This shift in investor thinking, from growth to maturity, explains why Marvell's P/E matches that of other semiconductor companies, but it doesn't quite explain why Marvell merits a valuation even worse than the other companies, such that it has been excluded from the market rebound.

To explain that, we have to look closer at Marvell Technology Group as an individual company to see if it deserves the same valuation as high quality tech giants like Intel and Qualcomm.

To look at Marvell's future earnings, we'll look at Inventory for the most recent quarter. Inventory reduced from 310 Million to 245 Million, a sign that Marvell is able to sell its goods and a positive indicator of future earnings, further more, while Finished Goods reduced by 46 Million, Work In Progress inventories only reduced by 18Million, a possible signal that in the face of increased demand, management is ramping up production. Of course, the main reason this is a good sign is that management is able to turn in sales. Accounts receivable stayed stable, increasing by 1% in the recent quarter. Thus, management seems very able to convert sales into cash for reinvestment as seen in the balance sheet. 

Of course, this is all irrelevant if it never touches the bottom line. Consistency of Marvell's bottom line in the face of intense market share competition is ultimately what makes Marvell worthy of an equal valuation. Here is Net Income and Revenue for the last 4 years:

2011, and essentially to build on that, the future's expectations seem to be what is holding Marvell back. Net Income had been recovering strongly form 2008-2010, and 2011 was evidence that it was beginning to falter.  Marvell's ability to show investors that 2011 was only a small pullback in a greater uptrend of net income will allow Marvell to merit a higher valuation. Marvell has been improving its margins quickly in recent years as well, with net profit margins going from 5% to 18% (25% in 2010) in 4 years.

Ultimately, I think this shows that Marvell deserves the higher valuation that other tech giants are receiving, and should be revalued in the future. Marvell clearly isn't valued as a growth company, but the valuation it's receiving is pricing in a greater decline than in income than should actually occur. But earnings are just one reason companies move in the markets. A far more grounded method to seeing if Marvell is really cheap is to find its intrinsic value, so in my next, and final, post on Marvell, I will analyze the company and its accompanying industry based on intrinsic valuation to better understand if the recent market performance correlates to a discounted cash flow style valuation.

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