What An Apple iPhone Teardown Reveals

by: Bret Jensen

Pacific Crest has done one of the first teardowns of the new Apple iPhones. While the launch of the 5s and 5c is critical to Apple (NASDAQ:AAPL) obviously, it is also a major catalyst to the firms that supply Apple the various components for its iconic smartphone franchise.

The passage in the synopsis of that report that caught my eye was this "Skyworks Solutions (NASDAQ:SWKS) slightly increased their 3 modules RF. Avago Technologies Limited (NASDAQ:AVGO) and TriQuint Semiconductor (TQNT) truly upped the game and "likely achieved more meaningful dollar content gains vs. SWKS on overall up PA content in the iPhone 5s."" Let's take a look at the valuation and prospects of these three Apple suppliers.

Skyworks Solutions offers analog and mixed signal semiconductors worldwide. The company provides power amplifiers and front-end solutions for smartphones. I have held these shares for some time and continue to have them in my portfolio even after their recent 20% rise over the past two months.

The company should post double-digit revenue increases for both FY2013 & FY2014. The stock sports a low five-year projected PEG of under 1 (.70). SWKS also is priced at 10x forward earnings, a discount to its five-year average (12.7). The company has met or beat earnings estimates for the last six straight quarters.

The shares currently go for under $26 a share. The median price target of 17 analysts that cover the stock is $30. Raymond James upgraded the shares to "Strong Buy" from "Outperform" last week. Finally, the company has a solid balance sheet with over $400mm in net cash on the books (~$2 a share). ACCUMULATE

Avago Technologies engages in the design, development, and supply of analog semiconductor devices with a focus on III-V-based products. Its product portfolio is comprised of RF amplifiers, RF filters, RF front-end modules, and other communication products. Its components are found in a variety of manufacturer's smartphones. This is another holding that has been in my portfolio for months.

The company is well positioned for the LTE build out happening globally. Revenue growth is projected to accelerate to over 15% in FY2014 after tracking to a 6% to 7% gain this fiscal year. The shares are priced at a little over 12x forward earnings, just slightly below its five-year average (13.1).

Avago has significantly beat earnings estimates each of the last three quarters, and beat the consensus for six straight quarters. In addition, the shares pay a 2.4% dividend yield. JMP upgraded the shares to a "Buy" earlier in the week and I would expect further upgrades if the new iPhones sell well. Finally, the shares are cheaper than they appear at ~$40 as the company holds more than $850mm of net cash on its balance sheet (~$3.50 a share). BUY

TriQuint Semiconductor provides radio frequency solutions and technology for mobile devices worldwide. This is my least favorite of the companies profiled in this article right now. The company posted a small loss in FY2012 and is tracking to a small earnings gain this fiscal year.

Earnings are expected to jump to over 50 cents a share according to consensus in FY2014. Revenues are also projected to accelerate to just under 20% growth in FY2014 after coming in with just under 10% gains in 2013.

At $8 a share, the stock is above the current mean analyst price target of $7.75 a share held by the six analysts that cover the stock. I liked the stock much more and held the shares last year when it was trading at $5 a share and insiders were buying. I find no compelling reason to own the stock now at these levels. AVOID.

Disclosure: I am long AAPL, AVGO, SWKS. 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.