This tech company’s shares were just initiated at Evercore ISI Group, with an ‘Outperform’ rating and upgraded at Deutsche Bank, to ‘Buy’.
Marvell Technology Group Ltd. (MRVL)
From Argus Weekly Staff Report
BUY-rated Marvell Technology Group Ltd. (MRVL) announced on 6/28/18 that China’s State Administration for Market Regulation has approved the company’s previously announced merger transaction with Cavium Inc. Marvell expects to finalize the deal, which remains subject to customary closing conditions, in July 2018.
By acquiring Cavium, Marvell will become a much more diverse company and will participate in a range of fast-growing markets. To Marvell’s base business in storage solutions, Cavium adds MIPS and ARM-based network processors, network security solutions, ARM server processors, DCI (data center interconnect) solutions, Ethernet connectivity, and other products. The deal also adds a leading HBA (server & storage connectivity) business to Marvell’s already strong storage platform.
China represented the last major regulatory hurdle in Marvell’s bid to acquire Cavium. In this era of tariff threats and counter-threats, regulatory approval of mergers and acquisitions has become a political tool. China’s MOFCOM was reportedly on the verge of granting Qualcomm approval to acquire NXP when the U.S. threatened to slap tariffs on an additional $200 billion in Chinese imports. Marvell and Cavium represent relatively small fish in the semiconductor sea and blocking this particular deal would have served no real purpose for China or any other jurisdiction.
Acquiring Cavium will significantly expand Marvell’s total addressable market while creating room for further efficiencies and synergies. MRVL shares have backed down in the technology selloff and while awaiting the catalyst of deal approval. Our analysis suggests the stock is undervalued compared to peers, on historical comparable valuations and based on cash flow growth prospects.
MRVL trades at 14.5-times our FY19 non-GAAP EPS estimate and at 12.8-times our FY20 forecast; the two-year-forward P/E of 13.6 is well below the average multiple of 18.5-times over the past five years. The two-year-forward relative P/E of 0.81 is below the trailing five-year relative P/E of 1.01. Our comparable valuation range for MRVL is in the low-$20s, near current prices and in a clear rising trend.
Compared with its peer group, MRVL trades at discounts on absolute and relative P/E, EV/EBITDA, and PEGY. Our forward-looking discounted free cash flow model points to a value in the mid- to upper $30s to low $40s, in a rising trend. Our blended valuation for MRVL is in the low $30s, in a moderately rising trend. Appreciation to our 12-month target price of $28, including the dividend yield, implies a risk-adjusted total return in excess of our forecast total return for the S&P 500 and is thus consistent with a BUY rating.
Given the company’s gathering momentum in key markets as well as attractive valuations, we believe MRVL shares warrant a BUY rating. We are reiterating our 12-month target price of $28.
Nancy’s Note: Cavium was recommended in issue 793, May 17, 2017, by Crista Huff, Cabot Undervalued Stocks Advisor.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, July 5, 2018