UBS Wealth Management Research / 09 July 2007
UBS Corporate Update: Marvell Tech Group
Strong earnings growth ahead--Lead Analyst, Cesare Valeggia
Stock Rating: Buy/Outperform / Estimated Fair Value Range: USD 22-USD 27
Highlights
Marvell restated earnings and concluded options investigations recently.
We have reduced our 2008E EPS to USD 0.27 from USD 0.41, and our 2009E EPS to USD 0.82 from USD 0.92.
Though we lower our EFVR from USD 25-30 to USD 22-27, we maintain our Buy/sector Outperform ratings.
Benefiting from a number of positives, Marvell (MRVL) has finally filed with the SEC its amended 10-Q which should ease all concerns on the stock options investigation and the risk of de-listing. Beyond this, due to the high cost of the acquired Intel cellular business and its lagging edge technology, MRVL's gross margin structure has been trailing its historical average. We believe this should reverse by year's end as it looks to outsource production to Taiwan Semiconductors.
Moreover, we see storage progressing with seasonality with some potential for market share gains, while communication chips should benefit from the upgrade cycle (i.e., GigE and WLAN). The adoption of WLAN capabilities on high-end phones is also a positive while MRVL should continue to see strong demand for its applications processors as it is driven by the success of the Blackberry. Finally, MRVL's ability to integrate several processors' functionally into one chip should help the company gain new customers as is evidenced by the winning of Apple's iPhone or Sony's PSX3.
Industry View: US IT moderate Overweight
UBS WMR recommends a moderate overweight on the US IT sector. Within the sector, we prefer companies that can benefit from a strong product cycle by expanding growth opportunities and relying on a sustainable business model, such as Marvell.
Valuation Methodology
MRVL should enjoy long-term demand growth for its hotspot, Gig Ethernet, Bluetooth and application processors. Therefore, we value MRVL using a PEG ratio analysis. We obtain the midpoint of our EFVR (USD 24.6) by applying a PEG ratio of 1.2 (30x our FY09E EPS of USD 0.82, assuming a 25% growth rate for the next 2-3 years). Our EFVR is adjusted for 10% volatility. This values MRVL in line with the MSCI North America semi and semi cap equipment. The multiple is fair as it reflects our expectations for above-average EPS growth and our conservative estimates on the gross margin expansion front.
Statement of Risk
Risks to our EFVR include: Hard disk drive sales could be weaker than anticipated due, for example, to slower migration to the Vista operating system and/or alternative storage solutions (NAND flash) being more price-competitive. Also, MRVL has meaningful revenue concentrations (four customers represent some 40% of total sales). Market share shifts between these clients could affect sales assumptions.
