Investors Should Consider Xilinx

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Jan 28, 2015

In this article, let's take a look at Xilinx Inc. (XLNX, Financial), a $10.43 billion market cap company that is one of the world's leading suppliers of programmable logic chips and related development system software.

Market share

The company is a key player in the programmable logic device segment and is exposed to the volatility of the industry. This one is cyclical and so it is subject to fluctuations. The semiconductor sub-industry is back on a growth path. These cycles cause the firm´s results to be somewhat volatile as well.

Both Xilinx and Altera (ALTR, Financial) have interesting market share, holding 50% and 39% respectively, according to Gartner. This contributes to expand loyalty to the company's products because of the familiarity customers gain when they start using one product.

Liquidity

The key liquidity ratios indicate that the company is unlikely to have financial difficulties in the near future.

Liquidity Ratios 2005-03 2006-03 2007-03 2008-03 2009-03 2010-03 2011-03 2012-03 2013-03 2014-03 Latest Quarter
Current Ratio 4.91 4.78 5.60 5.34 7.52 5.34 7.12 7.15 5.94 3.10 3.40
Quick Ratio 3.60 3.64 4.48 4.56 6.61 4.62 6.01 6.22 5.03 2.75 2.97
Financial Leverage 1.14 1.16 1.79 1.88 1.63 1.50 1.71 1.65 1.60 1.83 1.85
Debt/Equity — — 0.56 0.60 0.40 0.17 0.37 0.33 0.31 0.36 0.37

Attractive dividends

Xilinx has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2.9%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments and favorable expectations regarding dividend growth for the next years. Dividends have been paid since 2004.

Revenues, margins and profitability

Looking at profitability, revenue grew by 1.14% and led earnings per share slightly increased in the most recent quarter compared to the same quarter a year ago ($0.63 vs $0.62). During the past fiscal year, the company increased its bottom line. It earned $2.19 versus $1.78 in the previous year. This year, Wall Street expects an improvement in earnings ($2.36 vs $2.19).

Even though sales increased, the net income has decreased. Xilinx is extremely liquid.

The gross profit margin for the company is currently very high, at 72.04%, and it has increased from the same quarter the previous year. Along with this, the net profit margin of 27.58% is above that of the industry average.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
XLNX Xilinx 24.16
MCHP Microchip Technology Inc. 18.89
MU Micron Technology Inc 36.25
ADI Analog Devices Inc. 12.99
NVDA Nvidia Corp. 13.62
 Industry Median 4.7

The company has a current ROE of 24.16% which is higher than the one exhibit by Microchip Technology (MCHP, Financial), Analog Devices (ADI, Financial) and Nvidia Corp. (NVDA, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking for those levels or more, Micron Technologies (MU, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

03May20171201151493830875.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 16.4x, trading at a discount compared to an average of 69.6x for the industry. To use another metric, its price-to-book ratio of 3.9x indicates a premium versus the industry average of 2.0x while the price-to-sales ratio of 4.5x is above the industry average of 1.94x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $19,775, which represents a 14.6% compound annual growth rate (CAGR).

03May20171201161493830876.png

Final comment

We still believe that the popularity of PLD is rising because of its flexibility. Further, the per-unit costs are dropping contributing with profitability. These two things will benefit Xilinx in the future. Additionally, it has increased dividends to its shareholders in a regular basis.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like Steven Cohen (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Charles Brandes (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned