Idea List: Issue #15
This week I looked at two stocks with high free cash flow yield: Core Molding Technologies and Skyworks Solutions
With the market drama over the past few weeks I have shifted into high gear to find some potential new stocks for my portfolio. One area I was looking at was screening for companies with high free cash flow yield and low debt. I found a few companies that looked worth some initial research, so this week I decided to summarize two stocks that seemed potentially interesting.
Core Molding Technologies
One stock that caught my eye was Core Molding Technologies, a company that specializes in injection molded plastic. The company has a market cap of $138M, and is headquartered in nearby Columbus Ohio, so maybe I could go visit with management. Revenue is primarily driven by the medium and heavy-duty truck market, which accounts for slightly more than half of sales. Powersports represents the next largest segment, with the remainder coming from building products, industrial and utilities, and other categories.
Looking at their recent financials, Core Molding experienced a 15% decline in sales in 2024, bringing total revenue down to $302 million, compared to a peak of $377 million in 2022 and a five-year average of $313 million. Despite the drop in sales, gross margin remained stable at 17.6%, slightly above the five-year average of 15.7%. Earnings per share came in at $1.50, with the company essentially breaking even in the fourth quarter. Operating margins have averaged 5.5% over the past five years. Return on assets has typically been positive, though not particularly strong, with a five-year average of 5.9%.
CMT ended 2024 with $42 million in cash, a market capitalization of $138 million, and an equity value of $147 million. The company maintains a conservative balance sheet with a debt-to-equity ratio of 0.13. As for capital allocation, Core Molding has made some acquisitions in recent years, but shareholder returns low. There is no dividend, and the small stock buyback program likely only offsets dilution from stock options. Core Molding showed up in the screener with a high free cash flow yield. In terms of cash generation, CMT posted free cash flow of $23.6 million in 2024, aided by a boost from changes in accounts receivable, despite weaker earnings. The five-year median free cash flow stands at $15.4 million.
With CMTs low, but usually positive ROA it could be reasonable to value it based on assets or earnings power. For this quick valuation I will use the earnings power method. First, I will start with the five-year median operating profit of $17.6 million. Using a 22% tax rate and a 9% discount rate, the estimated enterprise value is $152.2 million. Adding back $42.2M in cash and accounting for $19.7 million in debt, the implied equity value is around $174.7 million, suggesting a fair value of approximately $20.10 per share. If the stock price dips slightly below current levels, it could present an attractive buying opportunity based on this estimate of earnings power.
Skyworks Solutions
During my day job, I am an analog circuit designer, so it was intersting to see a an analog/mixed-signal semiconductor company show up in my high free cash flow screen. Skyworks Solutions (SWKS) is a semiconductor company best known for its analog and mixed-signal chips that enable wireless connectivity, especially in mobile devices. The company is a key supplier to smartphones and other electronics, producing RF components that enable communication over Wi-Fi, Bluetooth, and cellular networks. Skyworks is heavily dependent on Apple for the bulk of its sales. However, in 2021, Skyworks made a significant acquisition to diversify its offerings and diversify beyond mobile.
From Skyworks latest quarterly report, the company showed a 4% sequential increase in sales, but down 11% year over year. The company guided for a mid-teen percentage decline in mobile revenue next quarter, consistent with seasonal patterns. The latest earnings call also mentioned it a new $2 billion share repurchase program alongside a current $0.70 per share quarterly dividend. Skyworks’ revenue peaked at $5.5 billion in 2022 but has since declined to around $4 billion on a trailing twelve-month basis. Despite the revenue drop, the company has historically earned returns on assets above its cost of capital, 2024 being an exception. Long-term revenue growth has been somewhat erratic, averaging 2.5% over the last 10 years and 6.7% over the last eight. Perhaps a 5% growth assumption could be a reasonable middle ground for valuation. SWKS has $995M in debt, but offsetting that is $1.75 billion in cash.
For the valuation, I will do a quick estimate using the growth-based valuation approach from Bruce Greenwald’s valuation book. First we can estimate Skyworks’ normalized NOPAT (net operating profit after tax) at roughly $1.072 billion, based on a five-year average revenue of $4.58 billion, a 46% gross margin, 26% operating margin, and a 10% tax rate. With an $8.6 billion market cap, this implies an earnings yield of 12.4%, and when combined with a 5% assumed growth rate, results in an estimated annual return of 17.4%. This return is probably more better than the market, so SWKS may be approaching an attractive valuation. However, a key uncertainty lies in the concentration of revenue from Apple, which investors should examine closely before making long-term assumptions. Also I would need to study the company more to refine my valuation assumptions.
Stocks Mentioned: CMT 0.00%↑ SWKS 0.00%↑
