The communication equipment and technology industry is fast moving and highly sensitive to market trends and sentiment. Any unfavorable move by the companies could result in sales and revenues slipping significantly. This cyclical industry boasts a wide array of firms which cater to a spectrum of customers by providing an even greater variety of products; from communication chipsets, to devices and systems. In this article, I will take a look at BlackBerry (BBRY), Cisco Systems (CSCO), Ericsson Telephone Company (ERIC), Qualcomm (QCOM) and Motorola Solutions (MSI). I will be only looking at the market fundamentals and base expectations on future investments of the companies.
Financial and Stock Position
(3 Yr Avg)
Dividend Yield, %
Return on Equity
Upside Potential to Reach a Fair Stock Value
Data from Morningstar and Financial Visualizations on Feb 10, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the five competitors, suggests that currently both Cisco Systems and Qualcomm are undervalued. In addition, EFS' fair stock price valuation indicates that currently CSCO is trading at the most attractive discount.
BlackBerry, formerly known as Research in Motion, has a 52-week range of $13.52 to $17.22. From being traded at $6 earlier in 2012 to now being primed to hit $20, the company's change in fortunes is due to expectations and speculation over the new BlackBerry 10 device. BBRY has a negative ROE due to the consistent loss of market share, sales and revenue on its older Java-based OS and devices. But even though the new BB10 has a faster browser, superior screen resolution and more memory than the iPhone 5, it is highly improbable that the device will be able to bring back lost customers. Moreover, BlackBerry has had negative earnings growth over the past 3 years and does not offer a dividend to its investors. There are whispers that BlackBerry only launched BB10 to make it more attractive to potential buyouts as the company tries to get itself out of trouble.
Cisco Systems is expected to announce second-quarter financial results on February 13th. The company has also agreed to buy self-optimization software called Intucell for $475 million, while Cisco's Linksys brand is being bought out by Belkin. Cisco has been dealing with macro-economic issues better than most of its competitors as it provides its technologies to business and governments all over the world. The company has had strong earnings growth over the past 3 years and also has a very attractive yield. Keeping in mind that the company already offers a great dividend of $0.56 per share every quarter, Cisco is an investor favorite.
Ericsson, the world's largest mobile telephone network equipment provider, posted a net loss for its latest quarter due to writing down the value of ST-Ericsson, its unprofitable smartphone component. On the sales front, the figures skyrocketed. In the U.S. and Canada alone, sales of mobile broadband and network gear improved by a whopping 86%. While earnings have not been spectacular over the past three years, the company's last quarter performance signaled a turnaround in global demand for its services, showing a sign of future improvement. By writing down a non-performing company of 5,090 workers, Ericsson will not only improve its ROE but also cut down costs for the future. Ericsson offers a very attractive dividend yield for investors, but concerns regarding sustainable performance in 2013 after its uptick remains to be the pivotal question for every investor.
With the recent acquisition of Atheros Communications (ATHR), Qualcomm has strengthened its leadership and dominance in providing wireless communication equipment. The company has strong fundamentals and earnings growth to support that fact. Earlier this year, Qualcomm reported quarterly earnings and revenue, beating expectations while raising its financial targets for 2013 due to growing demand for smartphones and high-speed wireless services. With its Snapdragon processors in demand for Google (GOOG) devices and now a potential low-end iPhone from Apple (AAPL), too, Qualcomm is expecting an incremental increase in revenue for every phone sold. While priced on the expensive side, Qualcomm has no debt for investors to worry about.
Motorola Solutions' fourth quarter earnings rose by 83% from the same quarter last year and further growth of 4-5% is expected in the current quarter. The reason behind such massive growth has been the record amount of government orders for two-way radios and other public safety communications equipment. Out of its peers compared here, MSI has a worrying debt/equity ratio reading. While it is fairly efficient in turning a profit and keeping costs down, its earnings over the past three years have not been positive or encouraging for investors. The cellphone maker bought by Google earlier is also planning to introduce a Windows 8 tablet in the future - with rumors of a Google-Motorola smartphone also in the air.
Make or Break for Investors
BlackBerry has made a commendable attempt to return to the forefront of the smartphone industry, but it seems to be too little too late to keep up with its dominant competitors. BlackBerry simply does not have any other revenue stream to fund its new BB10 for the long haul. Furthermore, the level of applications and support available for Android and Apple products cannot be replicated, also contributing to BlackBerry's continual lag. I do not believe that the recent gains on the market will continue for BlackBerry. Cisco makes a strong case for buying its stock because of its massively impressive last quarter and a very attractive dividend yield. But while it holds a unique position in selling networking products, its cyclical nature of sales and revenue is a concern for investors. Ericsson's strong and positive growth in the final quarter is undoubtedly a good sign, but perhaps it is currently too early to place promise and trust in the cheapest of all options available in this article. I am skeptical about Motorola's ability to churn out profits and maintain shareholder equity as long as Google does not realign its smartphone model with Motorola's hardware manufacturing capacity. I like Qualcomm because of its continued innovation and provision of highly competitive products to wireless phone manufacturers. The straightforward explanation for Qualcomm is that the more competitive smartphone industry gets, the more revenue Qualcomm will have to tap into.
Morningstar provides the following estimates for the above notes stocks. BBRY - 2/24 buy, 2/24 outperform, 12/24 hold, 2/24 underperform, 6/24 sell. CSCO - 5/11 buy, 2/11 outperform, 3/11 hold, 1/11 underperform. ERIC - 2/7 buy, 5/7 hold. QCOM - 9/14 buy, 1/14 outperform, 4/14 hold. MSI - 3/4 buy, 1/4 hold.
In my opinion, Qualcomm and Cisco are two stock options which provide safety and coverage from market shocks and difficulties. Their competitive advantage and in-demand nature of products make their balance sheets look healthier than those of their competitors. BlackBerry's tremendous run over the past 4 months will not last because it is fueled too much by speculation at a time when its BB10 will not be able to keep pace with the new Android and Apple products. Finally, Ericsson and Motorola Solutions do not have the cutting edge in product provision to steer an investor's decision away from Qualcomm and Cisco.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.