Rating Update: Stock Rating C-Neutral (12/2/19)-Monolithic Power Systems Inc (MPWR).

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BUSINESS

Monolithic Power Systems, Inc. designs, develops, and markets integrated power semiconductor solutions and power delivery architectures for consumer, computing and storage, industrial, automotive, and communications markets. It offers direct current (DC) to DC integrated circuits (ICs) that are used to convert and control voltages of various electronic systems, such as portable electronic devices, wireless LAN access points, computers, monitors, automobiles, and medical equipment. The company also provides lighting control ICs for backlighting that are used in systems, which provide the light source for LCD panels in notebook computers, monitors, car navigation systems, and televisions, as well as for general illumination applications.
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INVESTMENT RATING

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MPWR’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

MPWR has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. MPWR has a poor Appreciation Score of 29 but a good Power Rating of 80, leading to the Neutral Value Trend Rating.

MPWR’s stock is selling well above targeted value. The current stock price of $158.00 compares to targeted value 12 months forward of $125.
MPWR’s low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
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MPWR has a Power Rating of 80. (This good Power Rating indicates that MPWR has a better chance of achieving attractive investment performance over the near to intermediate term than all but 20% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; is currently in a modestly favorable positi; and earnings estimate behavior for MPWR has been slightly favorable recently.

INVESTMENT PROFILE

MPWR’s financial strength is exceptional. Financial strength rating is 100.
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Relative to the S&P 500 Composite, Monolithic Power Systems Inc has moderate Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that MPWR is extremely low risk. All factors are relative strengths. MPWR’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. MPWR has unusually low market capitalization.

CURRENT SIGNALS

MPWR’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.

MPWR’s current technical position is very strong. The stock price is in a 5.4 month up move. The stock has appreciated 41.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Monolithic Power Systems Inc (NASDAQ: MPWR) suffers from small negative changes in fundamentals: significant quarterly sales deceleration occurred.
The stock is currently rated C.
On 12/2/19, Monolithic Power Systems Inc (NASDAQ: MPWR) stock enjoyed a major increase of 17.1%, closing at $0.01. However, trading volume in this advance was unusually low at 60% of normal. Relative to the market the stock has been exceptionally strong over the last nine months but is unchanged during the last week.

CASH FLOW

In 2018, MPWR generated a very significant increase in cash of +$78.2 million (+26%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$125.8 million. Non-operating sources contributed +$5.0 million (+4% of EBITDA). Cash taxes consumed -$13.2 million (-11% of EBITDA). Re-investment in the business amounted to -$52.2 million (-41% of EBITDA). In 2018, debt investors had no impact on cash while equity investors furnished +$12.8 million (+10% of EBITDA).
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MPWR’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Monolithic Power Systems Inc Peer Group. In most years, MPWR was in the top quartile. Currently, MPWR is above median at +4% of EBITDA (+$5.0 million).

MPWR’s Cash Taxes, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Monolithic Power Systems Inc Peer Group. In most years, MPWR was in the top quartile. Currently, MPWR is slightly above median at -11% of EBITDA (-$13.2 million).

MPWR’s Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Monolithic Power Systems Inc Peer Group. In most years, MPWR was in the third quartile and second quartile. Currently, MPWR is substantially below median at -41% of EBITDA (-$52.2 million).

MPWR’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Monolithic Power Systems Inc Peer Group as well. In most years, MPWR was in the second quartile and top quartile. Currently, MPWR is upper quartile at 0% of EBITDA ( $0.0 million).

MPWR’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Monolithic Power Systems Inc Peer Group. In most years, MPWR was in the top quartile and second quartile. Currently, MPWR is at the upper quartile at +10% of EBITDA (+$12.8 million).

MPWR’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Monolithic Power Systems Inc Peer Group. In most years, MPWR was in the second quartile and top quartile. Currently, MPWR is substantially above median at +62% of EBITDA (+$78.2 million).
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MPWR’s Cash, %Revenue has suffered a strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Monolithic Power Systems Inc Peer Group. In most years, MPWR was in the top quartile and second quartile. Currently, MPWR is above median at +65%.

PROFITABILITY

MPWR’s return on equity reached a new post-2009 high in 2018.
This was due to very strong positive trend in pretax operating return and little change in non-operating factors.
The productivity of MPWR’s assets remained stable over the full period 2009-2019: asset turnover has exhibited little to no overall change.
Additionally, pretax margin enjoyed a very strong overall uptrend that sharply accelerated from the 2011 level.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
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MPWR’s return on equity is below median (14.2%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is slightly below median (12.3%) reflecting asset turnover that is at median (0.67X) and below median pretax margin (18.3%).
Tax “keep” rate (income tax management) is at the upper quartile (92.6%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is substantially below median (1.25X).

GROWTH RATES

There are no significant differences between Monolithic Power Systems’ longer term growth and growth in recent years.
Monolithic Power Systems’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 11.4% per year.

Total asset growth has been 11.5% per year.

Annual E.P.S. growth has been 20.7% per year. (More recently it has been 31.8%.)

Equity growth has been 10.2% per year.

Monolithic Power Systems’ consensus growth rate forecast (average of Wall Street analysts) is 21.4% — substantially above the average of the historical growth measures.
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Relative to the Monolithic Power Systems Inc Peer Group, MPWR’s historical growth measures are erratic. Revenue growth (11.4%) has been at the upper quartile. E.P.S. growth (20.7%) has been at the upper quartile. Equity growth (10.2%) has been slightly above median. Total asset growth (11.5%) has been above median.

Consensus growth forecast (21.4%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, Monolithic Power Systems’ stock price performance has been variable and exceptional. Between February, 2009 and December, 2019, Monolithic Power Systems’ stock price rose +1120%; relative to the market, this was a +188% gain. Significant price move during the period: 1) September, 2011 – August, 2018: +1372%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 28.3% is substantially above median relative to the S&P 500 Composite.
In addition to being substantially above median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 28.3% is above median relative to Monolithic Power Systems Inc Peer Group.

Current 5-year total return performance of 29.1% is upper quartile relative to the S&P 500 Composite.
Through October, 2019, with upper quartile current 5-year total return of 29.1% relative to S&P 500 Composite, MPWR’s total return performance is at the upper quartile relative to Monolithic Power Systems Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, MPWR’s overall valuation is exceptionally high. All five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/revenue, then by the price/earnings ratio. The lowest factor is the price/equity ratio.
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MPWR has a major value gap compared to the median valuation. For MPWR to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 10.49X to 5.29X. If MPWR’s ratio of enterprise value/revenue were to fall to 5.29X, its stock price would be lower by $-74 to $84.
For MPWR to fall to lower quartile valuation relative to the Monolithic Power Systems Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 10.49X to 3.81X. If MPWR’s ratio of enterprise value/revenue were to fall to 3.81X, its stock price would decline by $-95 from the current level of $158.

VALUE TARGETS

MPWR’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Monolithic Power Systems’ current Price Target of $127 represents a -20% change from the current price of $158.00.
MPWR’s low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 29, the high Power Rating of 80 results in an Value Trend Rating of C.
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Monolithic Power Systems’ current Price Target is $127 (+42% from the 2018 Target of $89 but -20% from the 12/02/19 price of $158.00). This dramatic rise in the Target is the result of a +40% increase in the equity base and a +1% increase in the price/equity multiple. The forecasted increase in cost of equity has a slight negative impact on the price/equity multiple and the forecasted decline in return on equity has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in growth has a large positive impact.
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PTR’s return on equity forecast is 24.5% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2010 and 2018. The current forecast is significantly above the 2011 low of 9%.

PTR’s growth forecast is 19.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly above the 2015 low of 8%.

PTR’s cost of equity forecast is 11.9% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2010 and 2018. The current forecast is above the 2013 low of 7.6%.
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At Monolithic Power Systems’ current price of $158.00, investors are placing a positive value of $117 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 14.0% per year, and a return on equity of 25.9% versus a cost of equity of 11.2%.
PTR’s 2020 Price Target of $127 is based on these forecasts and reflects an estimated value of existing assets of $50 and a value of future investments of $77.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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