Skyworks Solutions (NASDAQ: SWKS) is a mobile product provider based in Massachusetts. Despite the stock's recent run, it still has much more upside because the company's solid numbers into next year are going to make the stock drastically more attractive.
Before I get too specific about the company itself, I'd like to first discuss the company's sector and why its going to be such a hot space in the next few months. Basically, the company's products are going to be in tremendous use in the next few quarters as a result of the launch of Apple's (NASDAQ: AAPL) iPhone and continued advancements to Research in Motion's (NASDAQ: RIMM) BlackBerry. These smart phones are going to be huge contributors to Skyworks's top line because they need the company's products to perform the more advanced tasks being placed on smart phones, such as WiFi and GPS. The positive headlines which I expect to be flowing from this sector shortly (starting with Apple's upcoming quarter) should bolster Skyworks's stock appropriately.
But this stock isn't just a name that will move due to positive news from the smart phone space; this is a solid company that's hitting an inflection (turning) point. Despite showing weak performance sequentially and year over year in recent years, I think the company's revenue growth is going to return to positive territory within the next two quarters. I think the company is going to do about $190 million in sales next quarter -- a sequential increase of about 8%, but still a year-over-year decline of 4.5%. This figure is ahead of company guidance, which I think is low because the company was overly conservative when modeling Motorola's (NYSE: MOT) impact on sales. This Motorola factor is another potential catalyst because the company has the potential to easily beat estimates if Motorola steps up its business. Even if Motorola actually doesn't do much business with the company, I think Skyworks will be able to cover that lost business with new clients, just like it did last quarter.
The company positioned itself properly for this quarter. Because it expected increased demand for its FEM chips, it ramped up its inventory for this quarter to be able to match the demand. I think the company easily met Apple and Research in Motion's needs for the quarter.
Better yet, I think in the first quarter of next year the company will be able to do almost $210 million in sales, good for a sequential increase of more than 7% and the first year-over-year increase in more than a year, for roughly 7%. I've found that Wall Street reacts very strongly when a stock starts showing impressive revenue growth on both the year-over-year and sequential fronts, especially if the company has been in the process of turning around. The company is going to grow net income even more impressively than sales for two reasons: gross margin increases and less interest expense.
Gross margins at the company are going to increase as the company moves out of the Helios transceiver business and becomes more focused in the PA/FEM space. While this sounds really confusing, it's actually not that confusing. The company's involvement in the transceiver business was nowhere as strong as its involvement in the PA/FEM business. The FEM business has greater barriers to entry and more importantly, is a much stronger place to be for the next few quarters. This is because it's the PA/FEM products that are used in more advanced phones (e.g., smart phones) to perform cutting-edge tasks.
Less interest expense is going to be directly the result of the company paying down its debt in coming quarters, a move that I consider to be highly probable. Skyworks is already building up its cash position, and in its times of prosperity, which are soon coming, it's going to try to clean its balance sheet in case tough times hit the company again. Not only will this increase the company's net income, but it will also make the stock more favorable to investors because many are drawn to clean balance sheets.
Valuing Skyworks is when it gets difficult. In my research I've come up with valuations everywhere between $7.50 and $11 per share. What's more important for a stock like this, in my opinion, is the catalyst situation. As I've tried to lay out throughout this post there are several catalysts for the stock: increased exposure to PA/FEM space, the smart phone boom, positive comps into upcoming quarters and increasing margins.
Put it all together and I see no reason this stock's move can't continue.See also:
Kevin Kelly: AT&T: The safe bet on smartphone growth
Douglas McIntyre: Motorola earnings: A relief rally
Peter Cohan: Should you invest in iPhone's component suppliers?
Peter Cohan: More iPhone supplier investment possibilities
Why is gold making a new high, trading at $1,118.00 per ounce?
Chasing Value: Ten stocks for 2010 -- Part 1 
Closing Bell: A six-day rally (AIG, REGN, M, MOT, PALM, RIMM)
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