Why Marvell Is Worth the Risk Ahead of Earnings

While Marvell's turnaround won't be quick, the stock is still worth a long look from a risk vs. reward perspective.
By Richard Saintvilus ,

Marvell Technology (MRVL) - Get Report is set to report second-quarter fiscal 2016 earnings results after the closing bell Tuesday. Now would be an ideal time to place a bet on the company's long-term recovery. "Long-term" is the operative word here.

The Bermuda-based company has suffered from a spate of bad news, including a delay in first-quarter filing with the Securities and Exchange Commission.

Marvell has recently installed Matthew Murphy as its new CEO. Murphy, who comes from Maxim Integrated Products (MXIM) - Get Report , has established a strong track record for driving Maxim's growth and profits -- two things Marvell desperately needs.

The improvements won't be immediate, however.

Marvell stock closed Friday at an even $10 per share. The stock is down 0.58% year to date, including a decline of 8% since April. This compares with a year-to-date rise of 5.6% in the S&P 500 (SPX) .

Tuesday's results won't likely immediately reverse the trend.

Marvell has already given guidance for second-quarter revenue to be in the range of $710 million to $740 million, a decline of 14%, even at the high end of its range. The company has been adversely impacted by slumping demand in hard drive controllers. Its mobile baseband processor business is also being restructured.

To offset the revenue weakness, Marvell continues to transition toward the "Internet of Things." There it can better leverage its fabless position, which allows it to outsource its manufacturing and lower its costs. Marvell's low-cost operating style has helped the company amass some $2.2 billion in cash on its balance sheet with zero debt.

Add that to its $300 million in operating cash flow, and Marvell has the financial muscle to buy back more shares. Marvell bought roughly 1.4 million shares for a total of $22 million in the first quarter, while paying out a 6-cent per-share dividend for a 2.40% annual yield.

The clean balance sheet, strong cash flow and patent portfolio also make Marvell a solid M&A candidate. It owned an estimated 5,300 U.S. patents and more than 1,400 overseas patents as of January 31, 2015.

While Marvell's turnaround won't be quick, the stock is still worth a long look from a risk vs. reward perspective.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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