Citigroup Commentary on Pre-Announcement
3 November 2008 - 9 pages
Marvell Technology Group Ltd (MRVL)
Unsurprising Guide-Down, Surprising Margin Protection
* What's New - Monday post-close MRVL lowered its F3Q09 (Oct-Q) revenue outlook to -6-8% (from +2.5%) and provided a F4Q09 outlook of down 5-10%. The action is un-surprising given a sector-wide chip order deceleration since mid-Sept (on-cycle chip co's guided C4Q08 rev to -7.4% q/q avg). Indeed, last wk we proactively cut MRVL and other off-cycle estimates (10/31 "Decisively Cutting Estimates, Decidedly Bullish On Select Names")
* A Silver Lining In The Margin Outlook - We think fresh COGS initiatives under CFO Hosein are helping drive sequential gross margin improvement in the October and January quarters and to ~53.0-53.5% on a FY10 basis (CIR 52.3%). Coupled with equally potent expense management initiatives which should cut ~$5M of opex per qtr into 1H09, operating margins should trough at ~15.5% in April (on ~$690M in revenues). The trough shows an impressive 4x and 40% respective improvement over troughs of Jan-07 and Jan-08. Stock up 3.7% after-market, recapturing the day's 3.7% loss.
* Estimate Changes - Our updated estimates now bake in -6.5%, -9.0% and -3.0% revenue growth in the October through April quarters, for trough quarterly EPS of $0.15 vs $0.17 previously - good EPS protection. Our C08/C09E EPS fall to $0.85/$0.77 from $0.95/$0.89, while our target price remains $13 on an unchanged 15 P/E multiple but an increase in our EV/S multiple (to 2.6x from 2.2x) given higher gross margin.
* Implications - MRVL's negative pre: a) continues a swift and dramatic estimate pull-in sector-wide (positive revisions now 10% vs 7% at 2001 lows), b) bolsters conviction in similar activity from others (NSM), and c) given the positive gross margin and expense mgt performance adds ballast to our assertion that co-specifics can differentiate stock performance ahead.
* Stock Strategy - In the last three weeks we have signaled that Specialty Semi stocks are in the 'Buy Zone', and that investors should position in companies getting stronger in the down cycle. We are impressed with MRVL's margin and expense execution, and think the stock will begin to sustainably discount a positive operating margin inflection and the late-C09 STX desktop and notebook drive ramp early next year. Add to positions with a 61.5% pullback from 1H08 highs leaving EV/S and P/E multiples at 1.1x and 8.7x on our new est, risk/reward of 3.5:1 (-24% to recent lows, +94% to our $13 target). Reiterate Buy.
