Share Dilution

Monolithic: A Stock for All Ec

Looking for a stock that continues to generate higher earnings in all conditions and economic cycles?

This is what Monolithic Power Systems Inc. (MPWR, Financial) has delivered in recent years.

About Monolithic

Founded in 1997 and based in Kirkland, Washington, the company describes itself in its 10-K as “a global company that provides high-performance semiconductor-based power electronics solutions.”

He lists his three strengths as follows:

  • In-depth knowledge of the system
  • Strong expertise in semiconductor design
  • Innovative Proprietary Semiconductor System and Process Integration Technologies

The annual filing adds that these combined strengths enable the company to “deliver highly integrated monolithic products that offer energy-efficient, cost-effective and easy-to-use solutions for systems found in computing and storage, automotive, industrial, of communication and the general public”. .”

Here are the revenue contributions from its end markets:

Source: June 2022 investor presentation

The company designs, manufactures and sells more than 4,000 products, which are sold through “third-party distributors, value-added resellers and directly to original equipment manufacturers (“OEMs”), design manufacturers of origin (“ODM”), electronics manufacturing service (“EMS” suppliers and other end customers.”

Competition

Monolithic considers the industry to be highly competitive and names the following as its most significant competitors: Analog Devices (ADI, Financial), Infineon Technologies (XTER:IFX, Financial), NXP Semiconductors (NXPI, Financial), ON Semiconductor (ON, finance), power integrations (POWI, Financial), Renesas Electronics (RNECF, Financial), ROHM Semiconductor (ROHCY, financial), Semtech (TCMS, financial) and Texas Instruments (TXN, Financial).

The GuruFocus comparison chart shows Monolithic outperforming one of these rivals, as well as another semiconductor company, Skyworks Solutions (SWKS, Financial):

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In 10-K, Monolith claims it is competitive in the markets it serves because its ICs are generally smaller in size, highly integrated, have higher levels of power management features, and achieve high performance specs at lower prices than most of its competitors. .

Financial solidity

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There’s a lot of green on this table, and the interest coverage is particularly noteworthy since Monolith has zero debt.

At the bottom of the chart, we see a disproportionate relationship between the weighted average cost of capital (all shares) and its return on invested capital (all going to shareholders). Specifically, its WACC is 6.13% and its ROIC is 42.48%. It’s a company that obviously creates a lot of value for its shareholders.

Profitability

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An all-green table is a rarity, and one of the reasons Monolithic gets such a high GF score.

Even on the lighter green bars, the company is doing well. For example, its operating margin is higher than 79.73% of other companies in the semiconductor industry. Likewise, its net margin outperforms its peers and competitors by 77.85%.

Growth

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Over the past three years, it has recorded strong growth in sales, Ebitda and earnings per share without non-recurring items. Here’s what those metrics look like over a 10-year period:

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From the graph, we can deduce that the company has grown over the past decade, and with more momentum over the past two years.

Free cash flow growth was also strong, although the yellow bar indicates the rate is near the industry average. In its presentation to investors, the company said 47% of its available cash had been returned to shareholders.

Monolithic seems to be particularly proud of its ability to increase revenue, regardless of current economic conditions. Here is the first content slide from his June 2022 investor presentation:

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Dividends and redemptions

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Although it pays a significant portion of its cash flow to its shareholders, the dividend yield is relatively low. This is partly because the stock price has risen sharply in recent years:

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Nonetheless, Monolithic has ambitiously increased the rate of dividend growth since it began paying them in 2014. This growth helps explain why the yield did not fall further when the stock price rose in arrow.

At the same time, it continued to issue new shares, so the growth in the dividend per share came against an average growth of 3% per year in the number of shares over the past 10 years. This is a significant amount of dilution.

Evaluation

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We start with the obvious question: how does Monolithic get such a high ranking for GF value when all the metrics below it are red?

That’s because the GF Value ranking is determined by an exclusive GuruFocus formula. More specifically, it is based on the price/value ratio GF. To calculate this ratio, you divide the stock price ($454.19) by the GF value ($547.19) and that equals 0.83, which suggests it is slightly undervalued even though other key metrics appear to be high relative to other industry competitors. According to GuruFocus’ categorization, companies with GF Value ratings in this range rank better than companies that are significantly undervalued or overvalued.

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The discounted cash flow calculator produces an overvalued rating, with negative safety margins. The default growth rate in the growth phase is 20%, almost a third less than the 10-year earnings per share without the NRI average. At the 20% growth rate, the DCF number is a margin of safety of -107.46%; at 29%, we obtain a margin of safety of -12.11%.

Obviously, investors will have to do their homework on these valuations.

Overview of fundamentals

As of the close of trading on July 21, Monolithic had a perfect GF score of 100 out of 100. It stands alone with that score, making it the highest-rated public company in America, based on fundamentals:

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Gurus

Despite the scoreline, Monolithic was down to just six gurus by the end of the first quarter. These three had the biggest stakes:

  • Jim Simons

    (Businesses, portfolio)’ Renaissance Technologies held 153,526 shares after reducing its stake by 15.27%. This represented 0.33% of Monolithic’s outstanding shares and 0.09% of Renaissance’s assets under management.
  • Jerome Dodson

    (Trades, Portfolio) Parnassus Fund held 50,262 shares, an increase of 2.79% from the previous quarter-end.
  • Ray Dalio

    Bridgewater Associates of (Trades, Portfolio) held 10,119 shares, a new stake.

Conclusion

Monolithic Power Systems has many attractions for investors.

First, it has a track record of reliably generating revenue, which translates into earnings per share and should lead to share price appreciation and continued dividend growth. Second, it has an exceptionally good fundamentals score which should remain high due to its competitive advantages. Third, and whether it is undervalued or not, it is currently trading below its long-term average price.

Value investors who consider Monolithic to be undervalued will also note that it has no debt and may put it on their shortlists. Growth investors hoping for history to repeat itself may want to watch it. But income investors should look elsewhere for a stock with a significantly higher dividend.