Now that decades have passed since the beginning of the computing and Internet revolutions, many tech stocks are trading at low valuation multiples. This fall from grace is apparent in how the stocks of the SPDR Technology Selector Fund (NYSEARCA:XLK) trade at an average 13.7 price-to-earnings ratio, lower than the 14.01 price-to-earnings ratio of the S&P 500 (NYSEARCA:SPY) fund stocks. Tech stocks have ceased being the darling of investors and the sector is valued more conservatively than the broader stock market.
Investors can seize this opportunity by reviewing the challenges faced by different tech stocks that are priced as value investments. Which are value investments, and which might be value traps?
iPhone 5 Supplier Woes
Supply constraints for the iPhone may delay payback of Jabil's (NYSE:JBL) ambitious capital expenditures. Seventy percent of Jabil's 2012 capital expenditures were spent to accommodate production of iPhone 5 aluminum casings. This was a $337 million investment to help the manufacturer make components which could readily meet Apple's (NASDAQ:AAPL) high quality standards.
Though, the company's revenue has gone up by 2%, Apple is demanding a much higher quality casing for the iPhone 5. This has lowered Jabil's margins and caused its net income to drop by 28 percent. Apple needs to keep up with demand for the new iPhone model. Apple will probably become the source of most of Jabil's revenues since the project is currently producing 45% of the products sold by the company.
Component Ecosystem Shakeup
In a sense Jabil is a good story for computing component makers. The Windows-based personal computer ecosystem has been turned on its head. Personal computer sales have declined. Lower revenues for computer distributors have resulted in lower component orders. Component manufacturers respond by slashing budgets for new equipment used to fabricate their products. Weak PC sales are indirectly impacting component makers.
Applied Materials has reduced its industry-wide sales guidance for factory-equipment to $30-33 billion, below previous estimates of $32-35 billion. The company's forecast for its own sales in its fiscal fourth quarter was lower than those estimated by analysts.
Applied Materials (NASDAQ:AMAT) provides component-making equipment, and this major producer of chip making equipment plans to reduce its workforce by 9 percent. Its employee headcount would be reduced by 900 to 1,300 employees, saving $140 to 190 million per year.
Applied Materials' earnings can act as a barometer of electronics industry optimism. According to market researchers, the PC market will grow less than one percent in 2012 has been forecast to be the worst market in ten years. This will translate into slower orders for PC components, which could prompt companies like Intel (NASDAQ:INTC) to reduce spending. Intel is one of Applied Materials' biggest customers.
Qualcomm: A Bright Spot
Qualcomm (NASDAQ:QCOM), a major chip supplier, expects double-digit earnings per share and revenue growth, despite the economy being choppy. Over the next five years, it expects a compound annual growth rate of not less than 10 percent for revenues and earnings. At the company's annual investor day, Chief Executive Officer Paul Jacobs said continued growth in the chip business of the company will overwhelm any weakness in the economy. He also mentioned that the company will not change its dividend policy. The company reported earnings per share of $3.51 and revenue of $19.12 billion this fiscal year. Bernstein analyst Stacy Rasgon said, "The fact they're still looking at strong growth, that they have relatively conservative assumptions behind that growth, is promising. We're going to be lucky if semiconductors are flat next year and they're guiding up". Mr. Rasgon added that Qualcomm's guidance was better than the expectations for the semiconductor industry. Companies like Intel and Texas Instruments (NASDAQ:TXN) have been guiding for normal kinds of growth in their quarterly reports. Qualcomm's operating margins in its chip business was around 18.9 percent in 2012.It forecasted that its 2013 margins would be in the range of 18.5 to 20.5 percent.
Do any of these tech companies offer compelling value? Consider the following financial metrics:
EPS Growth Next 5 Years
Intel and Jabil offer the most value on the basis earnings, each trading below a bargain 10 price-to-earnings multiple. It's been a while since the enormous price multiples of the tech bubble. Both Intel and Jabil have similar forecasted earnings growth rates for the next five years.
Interestingly, these stocks also return capital to investors in the form of dividends:
With the exception of Applied Materials, each of these payout ratios is sustainable.
These are tough times for many tech firms. Intel looks attractively valued and pays dividends. Jabil is something of an indirect play on Apple, though it is experiencing difficulties keeping up and meeting specifications. In total, Intel looks to be an attractive buy candidate, while Jabil is a little more speculative. Both are interesting and worthy of further investigation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.