HIT Hitachi, Ltd. Common Stock

Marvell Technology Group (MRVL) is scheduled to announce its third quarter 2012 results on November 17, 2011, and we mostly see downward revisions in analyst estimates at this point of time.

Second Quarter Overview

Marvell Technology delivered a modest second quarter with its bottom line beating the Zacks Consensus Estimate by a penny.

Marvell Technology’s second quarter 2012 revenue was flattish year-over-year and within the guided range. The company’s supply chain was severely disrupted by the Japan earthquake. But now, the company seems to be in a recovery mode. The quarter’s improvement was mainly due to chip demand that was motivated by broad-based strength in the mobile computing market. However, lackluster performance in the PC market is keeping a lid on fundamentals.

Higher commodity costs and foundry prices, as well as investments in product launches led to margin contraction. As a result, earnings per share were lower than the year-ago quarter.

Despite the weak results, management was upbeat about its existing and newly launched products, which are competitive enough to benefit from the revival in demand.

Third Quarter Guidance

Marvell expects revenue in the range of $940.0 million to $980.0 million, and earnings per share of about 41 cents. The revenue guidance indicates a double-digit sequential growth in mobile and wireless revenue, high single-digit growth in networking revenue and a flattish storage revenue.

Overall, management remains optimistic about its investment in TD-SCDMA and SSD and expects it to improve results throughout the year. Management also remains focused on initiatives designed to increase revenue and profit through both new products and share gains.

Agreement of Analysts

According to the analysts, Marvell is well positioned to increase its share at Hitachi Ltd. (HIT) where its previous design wins have already started ramping. The company also announced mobile and desktop HDD design wins at Seagate that are expected to go into production in a few quarters. They expect these design wins to become material revenue drivers for Marvell over the next several years.

Some analysts are however concerned about the weakening trend in HDD following the weak PC demand. Moreover, the recent occurrence of a massive flood in Thailand has disrupted the production of a critical component –– computer storage drives. Factories producing a third of the country's hard drives have closed down temporarily, as conditions worsened since September. Analysts think that the situation will have a serious effect on the demand for Marvell’s HDD solutions.

Analysts have positive expectations for the second half of fiscal 2012. They are also positive on the company’s aggressive share buyback plans, but a weak outlook, lackluster demand and a potential supply cut at its major customer, Research In Motion Ltd. (RIMM), keep them cautious.

Out of the 13 analysts providing estimates for the third quarter and fiscal 2012, only one made a downward revision in the past 7 days. But in the past 30 days, 5 and 8 analysts reduced their estimates for the third quarter and fiscal year, respectively. A lack of movement was also noticed in fiscal 2013 estimates. The estimate cuts mostly reflect Research In Motion’s inventory overhang, the Thailand flood impact and the ongoing industry-wide HDD inventory correction.

Magnitude of Estimate Revisions

We observed downward movements in the Zacks Consensus Estimate for the third quarter and fiscal 2012 in the past 30 days. However, in the last ninety days, the Zacks Consensus Estimates for the third quarter and fiscal 2012 fell from 37 cents and $1.31 to 35 cents and $1.18, respectively.

The sharp drop in our estimates indicates concerns related to weak PC sales and the adverse effect of the Thailand flood.

Recommendation

Marvell Technology strong execution and its strong exposure to booming mobile computing market or tablets are encouraging. But, we remain apprehensive about stiff competition in the semiconductor market from major players such as Intel Corp. (INTC), Texas Instruments Inc. (TXN) and LSI Corp. (LSI). A significant number of pending lawsuits, weak PC demand, the Thailand flood and the company’s European exposure also concern us.

Currently, Marvell Technology has a Zacks #5 Rank, implying a short-term Strong Sell recommendation.

 
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