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Disciplined Skyworks "undervalued" says analyst

The top-flight power amplifier manufacturer has brighter growth prospects than industry leader RFMD, thanks to its focus on developing technologies such as W-CDMA and integrated front end modules, says a report from Morgan Stanley Research.

by Andy Extance
The future is looking bright for Skyworks, with a new analyst report predicting that its sales will grow 8-10 percent each year, along with rocketing profits.

Aaron Husock, of Morgan Stanley Research, adds that Skyworks is undervalued in comparison with the number one power amplifier (PA) maker, RFMD.

Husock said, “Skyworks is trading at a 27 percent discount to RFMD - despite 2007 operating margins expected to be more than twice those of RFMD.”

Although Husock admits his analysis has a more optimistic outlook towards the Woburn, Massachusetts, company than many of his peers, he cites the differing mixes of wideband CDMA (W-CDMA), transceiver and non-linear products as favoring Skyworks.

His report perceives Skyworks leading the development of W-CDMA PAs over RFMD.

He expects the firm to benefit from Nokia and Qualcomm's efforts to make W-CDMA more widely available in the handset market, despite “minimal sales to Nokia”.

Both RFMD and Skyworks are likely to gain from the move towards integrated front-ends for handsets, which incorporate switches, filters, duplexers and passives into one unit and can sell for up to three times as much as a standard PA.

By contrast, Husock presents a negative view of the transceiver market, which constitutes 33 percent of RFMD's sales but only 10 percent of Skyworks'.

Skyworks' “linear products”, the collection of non-handset devices for base stations and GaAs-based wireless LAN front ends, should also provide a welcome bonus, with Husock predicting 20 percent annual sales growth for several years in this business.

The report sounds a note of caution over the price erosion of front-end modules and W-CDMA, which is likely to accompany the increase in numbers of handsets containing these components.

Despite this, Husock believes “the margin risks are largely balanced by the opportunities”.

Interestingly, alongside the adoption of upcoming technologies, Skyworks' adherence to 4-inch wafer fabrication after its peers have moved to 6-inch may be characteristic of the financial discipline that Husock's analysis revolves around.

“The 4-inch GaAs process helps keep material costs down as it's very depreciated equipment,” he explains.

“The company has a strong history of operating expense controls, as quarterly operating expenses today are actually running 7 percent below where they were when the company was formed, despite a 20 percent increase in the revenue base.”

• Supporting Morgan Stanley's analysis, LG has included a highly integrated Skyworks power amplifier in its popular “Shine” phone.

The quad-band GSM and EDGE enabled module features two heterojunction bipolar transistor (HBT) PA blocks on an InGaP die.

Andy Extance is a reporter at compoundsemiconductor.net

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