As smart phones and tablets continue to dominate news headlines, I thought it would be interesting to take a look at a few value candidates within the sector. Surprisingly, several of the dominant smart phone players continue to sell at reasonable valuations. Here are six potential names that could be interesting value plays:
Research in Motion (RIMM)
Despite a strong recent run, the maker of the Blackberry continues to trade at reasonable levels. Revenues and operating income have increased at a 48% and 50% CAGR over the past five years, and their product continues to dominate the corporate market. While they are losing market share, they still control over a quarter of the smart phone market (per www.techeye.net/mobile/40-percent-of-new...). With the shares trading at 7.28x Ev / EBIT, valuation looks very reasonable, and growth from the tablet market could propel the stock higher in the next few years.
I know what you’re thinking- Radioshack? A smartphone play? Yes, a strong one. 45% of their sales come from mobile phones sales, and that number continues to grow. While revenue has shrunk over the past five years (due mainly to store closures), most of the store closures came from unprofitable low sales stores and their operating income has actually increased over the past five years. With their restructuring efforts behind them, the company may be poised to resume growth, and the potential addition of Verizon (the only major carrier they don’t carry) could serve as a catalyst to resumed growth. With shares trading for just 4.7x EV / trailing EBIT and the company coming off a $300mm share buyback, it wouldn’t take much growth to propel the shares higher.
To date, Microsoft’s mobile offering have been subpar, to say the least. However, there are reports that their new offering is enjoying significant success in emerging markets (http://www.techeye.net/mobile/windows-7-to-be-fastest-growing-smartphone-os-report), and many of their offerings (like bing or their gaming division) offer tangential plays on smartphone growth. The company has great returns on capital and buys back about ~5% of their shares per year, in addition to paying a nice dividend. Many people see their flat share price for the past ten years and think the company has stopped growing, but operating income actually increased at just under 8% CAGR over the past 5 years. With shares trading for less than 8x EV / EBIT, the company could make a tempting value play.
The leader in networking technology, CSCO seems to have their hand in everything tech related. As smartphone usage continues to drive network demand, CSCO’s products should continue to see increased demand. Revenues have increased at a 7% CAGR over the past 5 years and operating income at a 5.5% CAGR. This suggests some room for the company to improving earnings simply through cost cutting and margin improvement. Shares trade for 10x EV / trailing EBIT, which seems reasonable for a sector leader with a proven ability to grow both organically and through acquisitions and a history of large share buybacks (the company buys back between 3-5% of shares outstanding every year, and has recently announced they will begin paying a dividend)
Between the iPhone and iPad, Apple is the current beast of the smartphone movement. They control 27% of the market, and the number could grow as businesses continue to get comfortable with using apple systems on their networks and Verizon adds the iPhone to their network. Normally, you’d pay an exorbitant multiple for the leader of a rapidly growing industry with incredible returns on capital and possibly the best mgmt in the world, but shares trade at a still reasonable 15.6x EV / trailing EBIT versus a 5 year opering income CAGR of 50%.
The gorilla of search is also quietly dominating the smartphone industry. 40% of all new smartphones operate on the Android platform, and their market share is actually accelerating (they have mainly stolen from RIMM and the niche smartphone players). 5 year operating income CAGR stands at 33%, and their rapid growth should continue as their smartphone business and advertising business both benefit from cyclical and secular tailwinds (for advertising, the continued shift from print ads to online ads). Shares trade for 17.5x EV / EBIT, which is a bit high, but reasonable given their high ROIC, strong balance sheet, and potential for continued monster growth.
Disclosure: I am long RSH.