During the first half of 2013, Apple, Inc. (AAPL) shares lost some of their shine as several funds sold shares, putting further pressure on Apple stock price after it had reached a high of $705.07 on an intraday basis on September 21, 2012. Apple shares traded as low as $385.10 on an intraday basis on April 19, 2013, as its shares were sold by several funds including American Funds Growth Fund and Fidelity Contrafund among others.
Source: Yahoo Finance
Some of that selling pressure that drove Apple shares lower can give Apple shares and its suppliers a boost in the months ahead. Four such Apple suppliers that can ride on Apple's fortunes include Skyworks (SWKS), Qualcomm (QCOM), Micron (MU) and Broadcom (BRCM). Funds under-invested in Apple shares may rush to rebuild their long positions as Apple shares gain support from the new product cycle, attractive valuations as discussed in the article "Apple tastes better by the slice", Apple's existing dividend and share buyback program of $100 billion, as well as potential for additional steps to return cash to investors given Apple's still growing position of $147 billion in cash and long term investments.
A major catalyst that would initiate such rush would be continued success for Apple's new products including the iPhone 5c and iPhone 5s as well as future release of other products such as updated versions of the iPad (expected to be announced at an event on October 22, 2013) and MacBook. Although Apple shares have gained handsomely since the success of the iPhone weekend launch, gaining 10.2% from $450.12 on September 16, 2013 to $496.04 on October 15, 2013, substantial gains could still lie ahead. Apple's record sale of 9 million iPhones on the first weekend is substantially stronger than the 2012 first weekend sales of 5 million iPhones and 2011 sale of 4 million iPhones.
When Apple exceeded expectations for its iPhone launch in 2011, its stock price appreciated by 19.8% from $370.57 on September 1, 2011 to $443.95 on January 31, 2012. Meanwhile, when Apple faced production bottlenecks and component shortages in 2012, its share price decreased by 31.22% from $649.76 on September 1, 2012 to $446.92 on January 31, 2013 as its iPhone sales disappointed some analysts.
Analysts have recently become accustomed to the idea that Apple earnings are unlikely to deviate much from expectations. In the quarters ending June 2013, March 2013 and December 2012, earnings exceeded estimates by 2.05%, 0.9% and 2.52% respectively. Meanwhile, for the quarter ending December 2011, earnings exceeded estimates by 36.5% while they exceeded Apple's own guidance by 49.1%. According to SER, during the 10 quarters prior to the quarter ending September 2012 inclusive, Apple's earnings exceeded its own estimates by an average of 34.7% and exceeded analysts' estimates by an average of 22.8%.
Under Apple CEO Tim Cook, there is a policy shift to provide more accurate guidance for revenues and earnings than under Cook's predecessor, Steve Jobs. Yet, a successful launch of Apple's new products this year and a reduction of past bottlenecks with margin stabilization means one of two things: either Apple will make future announcements for higher earnings guidance (as they have already done once recently), or Apple's earnings for the quarter ending December 2013 may go back to its history of showing solid outperformance vs. average analysts' earnings estimates. Such outperformance could also get a boost by the success of Apple's iTunes Radio, which attracted 11 million unique listeners at its launch weekend, as well as the success of the introduction of iOS 7 which was running on over 200 million devices within one week of launch.
Skyworks Solutions Inc.
Skyworks Solutions Inc. develops analog semiconductors including amplifiers, attenuators, front-end modules and other, supporting broadband, cellular infrastructure, energy management, smartphone and tablet applications and more. Skyworks chips are used in multiple Apple products including iPhone 5, iPhone 5c/5s and other.
Skyworks shares are currently up 24.2% year-to-date from $20.30 on December 31, 2012 to $25.21 on October 14, 2013. Skyworks market capitalization currently stands at $4.73 billion. With average analysts' earnings estimates of $2.19 per share for the year ending September 2013 and $2.55 for the year ending September 2014, Skyworks currently boasts price/earnings ratios of 11.51 and 9.89 respectively. During the past several quarters, Skyworks actual earnings have been within 1 cent of expectations, while during the past 90 days, analysts have revised their earnings estimates for Skyworks higher by 5 cents from $2.50 to $2.55 for the year ending September 2014.
Skyworks currently has a price/book of 2.4 vs. industry average of about 2.8, while its 3-year average revenue growth has been about 25% vs. industry average of about 13%. Given Skyworks attractive forward price/earning ratio of 9.89, its impressive revenue growth during the past 3 years, recent upgrades to its earnings estimates and our outlook for higher than expected demand for Apple products during the next several months, we believe Skyworks offers good value for investors who share our outlook to buy shares at current price levels despite their recent appreciation.
Source: Yahoo Finance
Qualcomm Incorporated provides wireless technology and services, including CDMA technologies, powering the majority of today's mobile devices. Qualcomm's technology is used in multiple Apple products, such as the PM8018 RF power management IC used in the iPhone 5s and its LTE radio chips used in the iPhone 5c.
Qualcomm shares are currently up 9.52% year-to-date from $61.86 on December 31, 2012 to $67.75 on October 14, 2013. Qualcomm's market capitalization currently stands at $116.22 billion. With average analysts' earnings estimates of $4.54 per share for the year ending September 2013 and $4.94 for the year ending September 2014, Qualcomm currently boasts price/earnings ratios of 14.92 and 13.71 respectively. During the first two quarters of 2013, Qualcomm actual earnings matched estimates while for the quarter ending December 2012 its earnings of $1.26 per share exceeded estimates by as much as 13 cents. During the past 90 days, analysts have revised their earnings estimates for Qualcomm higher by 5 cents from $4.89 to $4.94 for the year ending September 2014.
Qualcomm currently has a 3-year average revenue growth rate of 22.4% vs. industry average of about 0.2%. Qualcomm's technology is used by multiple manufacturers of smart phones other than Apple, including Samsung. Meanwhile, Qualcomm is aiming to remain ahead of the pack by being the provider of choice for smartphone manufacturers as it is also reported that it is developing next generation neuro-inspired chips.
Although Qualcomm's forward price/earnings ratio of 13.71 is somewhat expensive, it is justified given Qualcomm's impressive revenue growth during the past three years. With recent upgrades to its earnings estimates for the year ending September 2014, its track record of having beaten earnings estimates for the quarter ending December 2012, and our outlook for higher than expected demand for Apple products during the next several months, we believe Qualcomm also offers good value to investors, as its stock price can build further on its year-to-date gains.
Micron Technology Inc.
Source: Yahoo Finance
Micron designs and builds advanced memory and semiconductor technologies including dynamic random access memory products (DRAM). Micron has recently solidified its position as a major supplier to Apple through its purchase of Elpida Memory, a DRAM supplier to the smartphone and tablet market. Elpida chips can be found in Apple's products including the iPhone 5c.
Micron's shares are currently up 169.2% year-to-date from $6.34 on December 31, 2012 to $17.07 on October 14, 2013. Micron's market capitalization currently stands at $17.64 billion. With average analysts' earnings estimates of $2.06 per share for the year ending August 2014 and $2.28 for the year ending August 2015, Micron currently boasts price/earnings ratios of 8.29 and 7.49 respectively.
Due to the integration of Elpida into Micron, there is no conclusive trend for change in analysts' estimates for Micron. However, such buyout is expected to provide a substantial boost to Micron, which will be in a stronger position to compete with Samsung (GM:SSNLF) and Hynix (GM:HXSCF) as its DRAM market share is boosted to 23% from 13%.
Furthermore, Micron's taking over of $1.75 billion of Elpida's debt is expected to be paid off over 7 years, but in case of industry turmoil which may lead to memory chip pricing pressures, hence affecting Elpida's Rexchip venture with Powerchip Technology of Taiwan, Micron would be insulated from paying off such debt as such debt remains on the books of Elpida's subsidiary. This positive structure justifies Micron receiving a higher price/earnings ratio than is typical for memory chip manufacturers as Micron can better weather a downturn in memory chip pricing.
Micron currently has a 3-year average revenue growth of about 19.7% vs. industry average of about 11.2%. Its price/book ratio stands at about 1.93, vs. industry average of about 2.3, although such figure will remain debatable depending on the valuation of Elpida's assets.
Despite Micron's substantial year-to-date stock price appreciation, its forward price/earnings ratio remains attractive, especially considering its ring fencing of the Elpida acquisition debt. With further support from solid revenue growth during the past 3 years, a stabilization of memory chip prices, and our outlook for higher than expected demand for Apple products during the next several months, we believe Micron shares still offer good value to investors and can appreciate further into early next year.
Source: Yahoo Finance
Broadcom Corporation offers semiconductor solutions for wired and wireless communication with system-on-a-chip and embedded-software solutions for voice, video, data and multimedia connectivity. Broadcom's chips are used in Apple products (such as the BCM5976 touch-screen controller chip used in the iPhone 5s), as well as in products offered by other mobile manufacturers. It also provides chips that are used in television set-top boxes supplied by satellite and cable TV service providers, while it also provides chips for wireless phone network equipment.
Broadcom's shares are currently down 19.66% year-to-date from $33.21 on December 31, 2012 to $26.68 on October 14, 2013. Broadcom's market capitalization currently stands at $15.45 billion. With average analysts' earnings estimates of $2.62 per share for the year ending December 2013 and $2.65 for the year ending December 2014, Broadcom currently boasts price/earnings ratios of 10.18 and 10.07 respectively. During the past 90 days, analysts have revised their earnings estimates for Broadcom lower from $3.13 per share to $2.65 for the year ending December 2014, and from $2.88 to $2.62 for the current year.
Following the release of its earnings for the quarter ending June 2013, Broadcom shares sank lower as it reported a loss of 43 cents per share due to a writedown on its acquisition of NetLogic. Furthermore, Broadcom forecast revenues of $2.05 billion to $2.2 billion for the third quarter, below analysts' estimates of about $2.25 billion. Excluding its acquisition costs, Broadcom's earnings were a profit of 70 cents vs. market estimates of about 68 cents.
Broadcom currently has a price/book of 1.9 vs. industry average of about 2.8, while its 3-year average revenue growth has been about 21.3% vs. industry average of about 13%. Its price/sales ratio is 1.8 vs. industry average of 2.6. Despite analysts' worries about Broadcom's future revenues, Broadcom shares currently boast attractive valuations and the shares have provided a substantial pullback. Given our outlook for higher than expected demand for Apple products during the next several months, we believe Broadcom offers a good buying opportunity, despite risks and competition it faces from Intel (INTC) and Qualcomm in newer LTE technology.
Vanguard total stock market index fund
Investors who share our outlook can buy the above stocks of Apple, Qualcomm, Micron, Skyworks, and Broadcom on an outright basis, or alternatively, can benefit from potential above average performance by such companies while maintaining a wider market exposure by buying Vanguard total stock market index fund (VTI).
Source: Yahoo Finance
VTI is currently the largest holder of Apple shares, holding about 1.47% of outstanding shares, as it is also among the top five holders of shares in Skyworks, Qualcomm, Micron and Broadcom. Given the fund's asset size of $272.9 billion, it is not surprising that VTI possesses such purchasing scale. The fund is currently invested at about 14.8% in technology, second to its 18.4% holding of financial shares. However, its largest holding is Apple, at about $6.3 billion as of September 30, 2013.
VTI is currently up about 23.3% year-to-date from $72.26 on December 31, 2012 to $89.09 on October 14, 2013. Meanwhile the Dow Jones industrial average is up 16.77% while the S&P 500 index is up 19.91%. An accelerated appreciation by Apple shares and its suppliers is likely to cause VTI to maintain its outperformance of the indices.
There is a good likelihood that Apple earnings for the quarter ending December 2013 will be revised higher, or that actual earnings will beat expectations by a larger margin than has been the case for the past three quarters. Such outlook, driven by higher demand than expected for Apple products, will probably also boost share prices for Apple suppliers. To such effect, we would recommend buying shares of Apple, Micron, Broadcom, Qualcomm and Skyworks on an outright basis, or in case investors are interested in maintaining a wider market exposure, and yet want to benefit from potential upside by these shares, we would also recommend buying Vanguard total stock market index fund.