In the past week, shares of chip maker Cavium (NASDAQ:CAVM) have jumped 14% after the analyst community started issuing bullish projections for the semiconductor industry. Cavium in particular is a mid-sized company, but as a specialist in ARM-based chips it is making inroads with big players like Qualcomm (NASDAQ:QCOM).
Based in San Jose, California Cavium designs, develops and markets chips that enable processing for a range of networking and communications applications. With a workforce of under 900, the company recently rolled out a number of 4G compatible semiconductor products designed for at home use as well as for businesses.
Cavium released its first-quarter operating results at the beginning of May and the announcement left something to be desired. Compared with the prior quarter, the company’s loss widened by 47% to $13.8 million. Adjusted earnings dropped to 2 cents per share, but because analysts forecast earnings of just 1 cent per share, the company posted a 50% earnings surprise. Meanwhile, sales climbed 19% quarter-over-quarter to $23.6 million.
There are currently 51 companies in the broad line semiconductor industry, the largest player being ARM (NASDAQ:ARM). Cavium falls right in the middle in terms of size, and falls in the upper quartile in terms of Price/Earnings to Growth ratio, earnings growth, sales growth, long-term growth rate and return on equity.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. The past 12 months have not been good to this company, to put it plainly. This time last year, the stock was a C-rated hold, but thanks to a series of abysmal earnings reports, each of the company’s eight fundamental metrics are now F-rated.
The only exception is cash flow, which still scrapes by with just a D rating. Meanwhile, buying pressure for this stock has hit rock bottom. This stock receives an F for its Fundamental Grade and an F for its Quantitative Grade.
As of this posting, June 13, I consider CAVM a strong sell. The fact that Cavium ranks relatively high compared with other semiconductor companies just shows us how troubled the industry really is.
Recommendation: Strong Sell
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