Sometimes the planets come into alignment for those that are watching closely enough.
First, some background:
Apple (AAPL), the master of supply chain management, has rearranged its supply chain from top to bottom. Some of this is to move away from Samsung (GM:SSNLF) who has been a supplier of over half the dollar value content in the iToys.
The new list of suppliers is not the normal low cost Chinese manufacturers. Instead Apple has given major mobile DRAM orders to Elpida, a Japanese memory supplier in bankruptcy, Flash memory business to Toshiba, display business to Sharp (SHCAY.PK) and Japan Display, camera chip business to Sony (SNE), and battery business to Toshiba (TOSBF.PK), Sanyo, and Panasonic (PC). The common thread here is that all the new suppliers are Japanese, some of whom are tipping into bankruptcy.
Is Tim Cook betting on a huge near-term devaluation of the yen? The devaluation of the yen simply has to happen for the survival of Japan as a modern economy. When that happens, Japanese companies will instantly become the low-cost producers of the products they make.
So far Apple has not invested directly into any of these suppliers, although their cash hoard would certainly allow that.
Some American companies have already moved on this front. For example, Micron (MU) has a signed deal in place to acquire Elpida out of bankruptcy for $2.5 billion. Elpida is the combined former memory divisions of NEC, Hitachi, and Mitsubishi. The combined amount of DRAM memory technology embedded in Elpida is breathtaking. Micron is buying Elpida for about 25% of the replacement cost for the factories. It gets better, the deal is denominated in yen payable over a six-year period. In a 50% devaluation of the yen, the $2.5 billion price effectively becomes $1.25 billion. Still, why would Micron want a money losing DRAM company? Notwithstanding the nonsense fed the press, there is nothing that Micron/Elpida can do to raise prices on DRAM to a profitable level. But a devaluation of the yen makes Elpida instantly profitable and could contribute $.80-1.00/share in earnings to Micron.
Qualcomm (QCOM) has recently committed $120 million dollar investment to Sharp. Intel and Dell (DELL) have also been invited to invest in Sharp. Sharp is a $29 billion dollar company with amazing display technology. The company has a market capitalization of $2.62 billion or 8% of sales.
Now, we get to Intel (INTC). Intel recently borrowed $6 billion at less than 2.5% for, "general corporate purposes and share buybacks." Intel has $6.3 billion left unspent on an existing share buyback program. Why another $6 billion and why now?
Is Intel getting ready to go on a Japanese shopping spree? Using Sharp as an example, Intel could buy a 30% interest in the company for about $800 million. Following a yen devaluation, Sharp could easily earn 10% on the $29 billion in sales, 30% of which would be reported as Intel income. That would be a one-year payback on Intel's investment. In the process, Intel would be supporting Sharp as a low-cost element of its own supply chain for display needs of Intel customers in ultrabooks, tablets and smartphones.
So, Intel could spend this money on share buybacks, or could spend it on non-controlling investments in struggling Japanese companies that, in turn, support Intel's own business.
If spent on shares, Intel would reduce shares outstanding by 5% which would increase EPS by 5%. If spent on distressed Japanese companies that turn profitable in a yen devaluation, the $6 billion could generate well over $1.00/per share to Intel with no other action. If the investment is less than a 50% interest, the profits (losses) are reported on the net-before-tax line at Intel. Pretty much rocking chair money.
A Sharp deal seems like an intelligent opening investment in quality Japanese companies. Touch screen displays and semiconductor products make up over 70% of the cost of an iPad and over 60% of an iPhone and an even higher percentage of the cost of ultrabooks.
This could be an opportunity for Intel that will never be available again and will disappear the day after a yen devaluation.
Watch for some activity along this line by Intel and other American companies with cash to spend.