Skyworks Solutions, Inc. (NASDAQ:SWKS) shares are up more than 26.75% this year and recently increased 0.57% or $0.54 to settle at $94.63. Microsemi Corporation (NASDAQ:MSCC), on the other hand, is down -4.19% year to date as of 12/15/2017. It currently trades at $51.71 and has returned 1.33% during the past week.
Skyworks Solutions, Inc. (NASDAQ:SWKS) and Microsemi Corporation (NASDAQ:MSCC) are the two most active stocks in the Semiconductor – Integrated Circuits industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect SWKS to grow earnings at a 15.45% annual rate over the next 5 years. Comparatively, MSCC is expected to grow at a 22.35% annual rate. All else equal, MSCC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 34.02% for Microsemi Corporation (MSCC). SWKS’s ROI is 24.80% while MSCC has a ROI of 8.20%. The interpretation is that SWKS’s business generates a higher return on investment than MSCC’s.
If there’s one thing investors care more about than earnings, it’s cash flow. SWKS’s free cash flow (“FCF”) per share for the trailing twelve months was +1.51. Comparatively, MSCC’s free cash flow per share was +1.18. On a percent-of-sales basis, SWKS’s free cash flow was 7.6% while MSCC converted 7.66% of its revenues into cash flow. This means that, for a given level of sales, MSCC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. SWKS has a current ratio of 6.80 compared to 1.90 for MSCC. This means that SWKS can more easily cover its most immediate liabilities over the next twelve months. SWKS’s debt-to-equity ratio is 0.00 versus a D/E of 0.90 for MSCC. MSCC is therefore the more solvent of the two companies, and has lower financial risk.
SWKS trades at a forward P/E of 11.88, a P/B of 4.27, and a P/S of 4.73, compared to a forward P/E of 11.18, a P/B of 2.99, and a P/S of 3.34 for MSCC. SWKS is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. SWKS is currently priced at a -19.99% to its one-year price target of 118.27. Comparatively, MSCC is -18.75% relative to its price target of 63.64. This suggests that SWKS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for SWKS and 2.00 for MSCC, which implies that analysts are equally bullish on their outlook for the two stocks.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. SWKS has a beta of 0.85 and MSCC’s beta is 1.14. SWKS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. SWKS has a short ratio of 3.96 compared to a short interest of 4.20 for MSCC. This implies that the market is currently less bearish on the outlook for SWKS.
Skyworks Solutions, Inc. (NASDAQ:SWKS) beats Microsemi Corporation (NASDAQ:MSCC) on a total of 8 of the 14 factors compared between the two stocks. SWKS is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. SWKS is more undervalued relative to its price target. Finally, SWKS has better sentiment signals based on short interest.