Marvell Tech Is A Buy On New Management, Buybacks: Credit Suisse

While Marvell Technology Group Ltd. MRVL is still in the early stages of an operational turnaround, moves by new management, share buybacks and a conservative FQ3 guidance suggest upside to the company’s shares, Credit Suisse’s John W. Pitzer said in a report. He upgraded the rating on Marvell Tech from Neutral to Outperform, while raising the price target from $13.50 to $17.50.

Although Marvell Tech’s shares have appreciated 65 percent off their bottom, they continue to be “attractively valued,” analyst Pitzer commented.

Self-Help And Growth Optionality

Marvell Tech’s operational turnaround initiated by the new management team could support operating margin expansion from ~13 percent in FQ2 to ~25 percent exiting FY18. This would drive earnings potential from $0.10 in FQ2 to a full-year figure of ~$1.15 in FY18. Pitzer enumerated the following positive catalysts:

1. Moves by new management: The new team may lower operating expense by ~15-20 percent and still be able to invest in new growth initiatives. Management is expected to provide details of the new strategy in late Q4 or early Q1.
2. Upside to guidance: The topline and GM guidance for FQ3 appears conservative. The analyst pointed out that management had guided to a sequential gross margin contraction of ~160 bps “despite a positive mix shift to their higher GM margin business, Storage.”
3. Share buybacks: Marvell Tech has ~$3.00 in net cash per share and has not repurchased shares in the last three quarters, and is likely to start returning cash to shareholders.

There is almost 40 percent upside to Marvell Tech’s stock largely based on “self-help and operational execution,” Pitzer stated.

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