Name That Trade – $MRVL: Considering Semi Targets

by Dan May 28, 2015 3:35 pm • Commentary

Last night on CNBC’s Fast Money we discussed semiconductor stocks and the potential for continued M&A activity, watch here:

While I am generally skeptical of chasing “other” takeover candidates after announced deals, Marvell Technology (MRVL) is a fairly cheap stock even if it wasn’t on the short lists of a potential acquirer.

I am not alone in this thought, as the stock has rallied 6% since the Broadcom rumor hit the wires yesterday. Despite the recent gains, the stock is down nearly 2% on the year, and down 15% from the 52 week highs made in February. The under performance is largely the result of expectations of poor Q1 earnings and weak forward guidance (which they did issue last week sending the stock down 8.5% on May 21st (read here)).

If we are in an environment where semiconductor companies feel they need to buy vs build in an effort to create scale and cut costs to combat slowing growth and profitability then MRVL, with an expected $3.3 billion in sales in the current fiscal year and trading at a market cap just above that number, looks cheap next to BRCM which just got taken out at 4x sales.

Oh, and the balance sheet. MRVL has 34% of their $7.3 billion market cap in cash and no debt which makes it a fairly easy tuck in acquisition for larger players looking to gain market share in the growing Chinese LTE smartphone market.  The Q1 report was not pretty, with sales coming in 10% below consensus with weakness across the board in their PC, storage and wireless businesses.

So is it worth owning a potential takeover candidate, that by most metrics is a cheap stock, but with a backdrop of poor fundamentals and likelihood of further deterioration in the near term?  Playing for takeouts with long premium options trades is a tough way to make a living. But for those who think MRVL has other merits, it makes sense to consider ways to do so either defining risk or giving yourself some room to the downside in the event the stock gives back some of the recent gains.  

Potential Trades:

 Defined Risk- MRVL ($14.25) Buy the Aug 14 call for 1.10

Break-evens on Aug expiration: Losses of up to 1.10 below 15.10 with total loss of 1.10 below 14. Unlimited gains above 15.10.

Rationale: The Aug 14 calls are dollar cheap in a stock that has a chance to be in play in the semiconductor m&a trend. Even if it’s not on someones shopping list the stock is cheap. However, declining fundamentals means that a defined risk call is a much better bet here than being long the stock.


Defined Range – MRVL ($14.25) Buy the Aug 13 / 15 Risk Reversal for .20

-Sell to open 1 Aug 13 put at .45

-Buy to open 1 Aug 15 call for .65

Break-evens on Aug expiration: Losses of up to .20 between 15.20 and 15, put the stock at 13 and suffer losses one for one with the stock. Gains above $15.20

Rationale: This trade structure offers some room for error on the entry, a similar break-even to the straight call purchase, but lacks the defined risk aspect.