Apple Supplier Skyworks a Great Buy

Skyworks Solutions (NASDAQ: SWKS) has three power amplifier chips in Apple’s (NASDAQ: AAPL) iPhone 4, one power amp in the iPhone 3 and 3GS, and a power amp in the iPad. That’s a supply chain investors can believe in.

Sales to Apple were a big driver of the excellent quarterly results [Skyworks reported last month], and will continue to create strong revenue growth this year. Apple obviously is very happy with SWKS as a supplier, and Skyworks also supplies all the leading smart phone manufacturers.

Skyworks is inside the new Motorola (NYSE: MOT) Droid X that went on sale for Verizon (NYSE: VZ) wireless subscribers. In addition, Apple should introduce a CDMA version of the iPhone in the second half of the year, both Nokia (NYSE: NOK) and Samsung have new smart phones coming using SWKS radio chips, and the company should have additional new design wins at HTC, ZTE, Research in Motion (NASDAQ: RIMM), LG, and Qualcomm (NASDAQ: QCOM) in cell phones in the second half.

Smart phones have been a gold mine for SWKS. The smart phone market will grow 42% over the next two years, and the explosion of mobile data is leading to a major network capacity upgrade of routers and other network equipment.

The company also has started shipping chips to Cisco Systems (NASDAQ: CSCO) for that company’s new multi-room digital video recorder that supports Verizon’s FiOS fiber-to-the-home service.

Last month, Skyworks reported earnings of $275.4 million, up 44% from last year and 15% sequentially. Pro forma earnings hit 32 cents, two cents above their guidance and the consensus. Gross margins expanded to 43.3%. The company retired over $20 million of its March 2012 convertible bonds.

On [its recent] conference call, management guided for $300 million in sales in their September fiscal fourth quarter and 37 cents a share in earnings. Wall Street analysts scrambled to raise their estimates—they had been looking for 34 cents.

Management cited the much larger number of customers they now have, including many in areas outside of their original cellular handset business. In the cellular market, they are winning designs on both the handset side and the network infrastructure side.

Smart phones are growing three to four times as fast as the 8% to 10% growth in the overall handset market. My checks in Asia indicate that the foundries that use the advanced fabrication process equipment required to make power radio frequency chips like those designed by Skyworks are running at full capacity, which confirms Skyworks’ very positive outlook.

I think SWKS can earn $1.50 in the September 2011 fiscal year, about 10% higher than the consensus of $1.35. That is worth at least a 15x price/earnings ratio, or $22.50. In addition, it has about $2.35 in net current assets.

SWKS is a buy on any dips under $14 for my raised $22 target by the end of the year.

As of this writing, Michael Murphy was recommending SWKS shares to subscribers of his New World Investor newsletter. Click here for more investing ideas from

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