Morgan Stanley Highlights Concerns From Apple Supplier Skyworks' Report

Morgan Stanley reiterated its Underweight rating on Skyworks Solutions Inc SWKS, saying the Apple Inc. AAPL supplier is not seeing any operating leverage despite anticipating stronger sales.

Q1 Report

Skyworks reported better-than-expected first-quarter results and guided second quarter above Street.

Despite signs of a deteriorating conditions in the smartphone supply chain, Skyworks still guided March quarter sales $22 million above the Street. But, gross margins were guided about 100 bp below the Street and down sequentially despite favorable broad market mix and Skyworks' plan to keep inventory and utilization flat.

“We remain Underweight SWKS, as even though the company is delivering growth slightly above our expectations it is accompanied by weaker GMs,” analyst Craig Hettenbach wrote in a note.

Looking Forward

Hettenbach estimate gross margins in mobile will decline 100bps year-over-year and 150bp quarter-over-quarter to 48.5 percent in the March quarter, influenced in part by changes in customer mix. The analyst also said he heard of increased overtures by Apple looking for pricing concessions.

Hettenbach is wondering whether weaker gross margins at both Skyworks and Qorvo Inc QRVO is start of a trend as margins at both companies were 10–15 percent points lower over the past five to 10 years. Also, amid slowing unit growth, large OEMs are trying to cut component costs to maintain their margins.

However, the analyst raised his EPS estimates on higher sales guidance from the company. The analyst also upped his price target by $5 to $66.

“Our FY17/18 Non-GAAP EPS estimate comes up by $0.18/$0.15 to $6.06/$6.44 as the benefit from higher sales more than offsets the drag from lower GM,” Hettenbach continued.

Shares of Skyworks closed Thursday’s regular trading at $78.46. In the pre-market hours Friday, the stock is up 7.70 percent to $84.50, a new 52-week high for the stock.

At Last Check

• Shares of Apple were up 0.25 percent at $120.07.
• Skyworks was up 12.12 percent at $87.97.
• Qorvo shares were up 5.01 percent at $61.23.