“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, December 17, 2018

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – Skyworks Solutions Inc (NASDAQ: SWKS) Puts

Monday, December 17, 2018

** OPTION TRADE: Buy the SWKS FEB 15 2019 67.500 PUT at approximately $3.45. Place a pre-determined sell at $6.90.

Also include a protective stop loss of $1.35.

Skyworks Solutions Inc (NASDAQ: SWKS), a smartphone chip supplier, has been pounded mercilessly since its earnings shortfall in July. That was around the $100 level, and now the stock price is about 30% lower in just five months.

There is no relief in sight. Though the semiconductor maker is larger than ever, the stock has declined to its lowest level since 2016.

The reason? Declining sales of smartphones -- especially worry over key customer Apple (NASDAQ: AAPL) and how many iPhones will be sold in the next year.

Consumers in developed markets such as North America and Europe are holding on to devices for longer, and sales in emerging markets such as China are slowing down, too, as fewer people are without a smartphone. The result is a cyclical business that ebbs and flows with demand for phones.

First-quarter revenue is expected to decline 4% year over year, and adjusted earnings are slated to fall by 5%. Skyworks doesn't provide full-year guidance, so with uncertainty surrounding 2019 overall -- especially with some Wall Street analysts predicting a down year for the semiconductor industry -- that explains the steep decline in share price.

About Skyworks Solutions …..

Skyworks Solutions, Inc, together with its subsidiaries, designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, antenna tuners, attenuators, circulators/isolators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase locked loops, phase shifters, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, voltage controlled oscillators/synthesizers, and voltage regulators.

Past Performance…..

A month has gone by since the last earnings report for Skyworks Solutions. Shares have lost about 19% in that time frame, underperforming the S&P 500.

Skyworks Solutions Inc. delivered fourth-quarter fiscal 2018 non-GAAP earnings of $1.94 per share, which beat the Consensus Estimate of $1.91 per share. Earnings also came above management’s guidance of $1.91 per share. The figure improved 6.6% from the year-ago quarter.

Revenues of $1.008 billion were up 2.3% year over year and 13% sequentially, primarily due to robust design wins in mobile business and Internet of Things (IoT).

Further, the revenue figure marginally surpassed the Consensus Estimate of $1.001 billion and exceeded management’s guidance of $1 billion.

However, guidance left a bit to be desired, particularly as investors worry that demand for the latest iPhones may be lukewarm. Representing a full 47% of sales last fiscal year, Apple is by far Skyworks' largest customer.

Future Earnings…..

Skyworks issued a forecast for the fiscal first quarter calling for revenue in the range of $1 billion to $1.02 billion, which should translate into non-GAAP earnings per share of $1.91. Notably, Skyworks pointed to "unit declines in premium smartphones" as a contributing factor in the outlook. Other notable iPhone suppliers have similarly been issuing their own warnings regarding the coming quarter, forming a constellation of data points that is only exacerbating investor sentiment around the Mac maker and its suppliers.

On the earnings call last month, Skyworks CEO Liam Griffin assured analysts that the company's "content position is solid," so it's not that Skyworks is losing design wins at Tier 1 manufacturers to competitors. "So it's not a case where we fumbled and didn't execute or weren't able to win the sockets that we pursued," Griffin added. While Apple has for years been trying to shift a core part of its investing thesis toward its services business, hardware component suppliers don't have that luxury, so the global smartphone market's slowing growth will weigh on those companies' prospects.

Analysts Opinions

Demand for semiconductors is getting worse across multiple end markets, according to KeyBanc Capital Markets.

The firm's chip analysts believe the sector is struggling with inventory problems and weaker than expected orders.

Chip companies are "staring into a Black Hole," analyst Weston Twigg wrote on Sunday. "Demand headwinds are persistent, with very little visibility into [the first quarter]. We believe overall semiconductor demand has additional downside risk entering [the first half of 2019], a headwind for the stocks."

The analyst cited KeyBanc's recent checks with chip customers and supply chain suppliers, which revealed poor demand in China and several end markets including smartphones, PCs, and cloud computing. He also noted "uncertainty" from companies due to the ongoing trade war between the U.S. and China.

Twigg said his recent checks suggest distributor sales are tracking down more than his previous estimates.

"As demand gets weaker, we are seeing an increasing rate of suppliers managing the channel and pressuring distribution to take inventory," Twigg said.

As a result of these negative demand trends, he lowered his ratings to Sector Weight from Overweight for Skyworks Solutions (SWKS).

Several equities analysts have recently commented on the company…..

  • Susquehanna Bancshares assumed coverage on Skyworks Solutions in a research note on Friday, December 7th. They issued a “neutral” rating and an $80.00 price target for the company.
  • ValuEngine upgraded Skyworks Solutions from a “strong sell” rating to a “sell” rating in a research note on Thursday, December 6th.
  • UBS Group assumed coverage on Skyworks Solutions in a research note on Thursday, December 6th. They set a “neutral” rating and a $70.00 price objective for the company.
  • TheStreet lowered Skyworks Solutions from a “b-” rating to a “c+” rating in a research note on Friday, November 30th.
  • Bank of America lowered shares of Skyworks Solutions from a neutral rating to an underperform rating in a research report released on Tuesday, November 20th. They currently have $75.00 price target on the semiconductor manufacturer’s stock, down from their previous price target of $92.00.
  • Finally, Cowen reiterated a “market perform” rating and set an $80.00 price objective (down from $95.00) on shares of Skyworks Solutions in a research note on Thursday, November 29th.
Insider news……

Director David J. Aldrich sold 5,500 shares of the stock in a transaction on Friday, October 5th. The stock was sold at an average price of $90.48, for a total value of $497,640.00.

Also, Director David J. Aldrich sold 3,000 shares of the stock in a transaction on Friday, October 19th. The shares were sold at an average price of $87.14, for a total value of $261,420.00.

Over the last quarter, insiders sold 21,500 shares of company stock worth $1,930,810. Insiders own 0.47% of the company’s stock.

Summary

Skyworks Solutions will open at $68.69 on Monday. Skyworks Solutions Inc has a 52 week low of $65.81 and a 52 week high of $115.98. The firm has a market cap of $12.19 billion, a price-to-earnings ratio of 10.36, and a PEG ratio of 0.84 and a beta of 0.60.