Apple and Altera: 2 Profitable Tech Giants Outdoing Their Peers

|
 |  Includes: AAPL, ALTR
by: Investment Underground

By Roger Choudbury, Lead Editor

We came up with two stocks in the hardware sector with high returns on invested capital relative to their peers. We evaluated for consistency of profitability over the last 5 years. Here they are:

Apple (NASDAQ:AAPL) put up a ROIC of 36.8%, for the trailing 12 months ending in December 25, 2010, and also produced $76.28 billion in revenues. As we wrote recently, we think Apple will be a winner in the tech space this year.

Profit and EBIT margins were 38.76% and 28.5%. ROE was 36.8%. Ending in September, profit margins in 2010, 2009, 2008, 2007, and 2006 were, 39.38%, 40.14%, 34.3%, 33.97%, and 28.98%. The respective EBIT margins were 28.4%, 28.1%, 21.2%, 20.86%, and 14.59%. Apple shares trade under a P/E multiple of 19.1, given that the most recent annualized EPS is $17.93. The 30 day put/call ratio is 0.7. The computer hardware sub-industry has an average gross margin of 7.57%, ROE of 30.1%, D/E of 0.42, and P/E of 16.5.

Hewlett-Packard (NYSE:HPQ) is a peer company that brought in $127.15 billion in revenues and in the 12 month period ending in January 31, 2011. ROIC is 10.88%, taking out accounts payable, employee compensation and benefits, and other accrued liabilities from total assets to determine invested capital. The EBIT and profit margins were 9% and 24.1%. Ending in October, profit margins in 2010, 2009, 2008, 2007, and 2006 were 23.76%, 23.59%, 24.4%, 24.36%, and 24.25%. The respective EBIT margins were 8.7%, 8.2%, 8.85%, 8.8%, and 7.85%. The EPS is $3.93 for the trailing 12 months, which sets the current P/E as 10.7. The 30 day put/call ratio is 0.7.

Dell (NASDAQ:DELL) made $61.49 billion in revenues, for the year ending in January 2011. The ROIC is 11.39%, when taking out only accounts payable and accrued and other liabilities from total assets to get invested capital. The EBIT and profit margins were 5.4% and 18.5%. For the same time period in 2010, 2009, 2008, and 2007, the EBIT margins were 3.8%, 5.4%, 6.26%, and 5.8%, respectively. The profit margins were also 17.5%, 17.9%, 19.09%, and 16.57%. The current P/E is 11.1 under an EPS of $1.35. The 30 day put/call ratio is 0.7.

Google (NASDAQ:GOOG) competes with Apple in a different products segment than computer hardware. It made $29.3 billion in revenues with a ROIC of 19.07%. The EBIT margins in 2010, 2009, 2008, 2007, and 2006 were 36.8%, 35.4%, 26.86%, 34.19%, and 37.8%. The respective profit margins were 64.47%, 62.6%, 60.4%, 59.9%, and 60.16%. The Company produced an EPS of $26.31 in 2010, which yields a P/E of 23.1. The 30 day put/call ratio is 0.8. As we discussed here, we think Google will remain dominant and believe shares are undervalued.

Investors expect Apple to outperform Dell and Hewlett-Packard. Given the put/call ratio of below 1, most investors believe that AAPL is undervalued. We value shares at $450 apiece using a 10% discount rate. Google still beats Apple in efficiency, and the markets agree, as Google shares have a higher P/E multiple than AAPL.

On Thursday, February 24, Intel (NASDAQ:INTC) (one of our dividend kings) introduced “Thunderbolt technology,” a new high-speed PC connection technology. Running at 10Gbps, this permits the transfer of a full-length HD movie in less than 30 seconds. This was developed in technical collaboration with Apple, and is available first on Apple’s new line of MacBook Pro laptop computers.

Altera (NASDAQ:ALTR) returned 35.5% on invested capital, and had revenues of $1.95 billion in 2010. From 2006 to 2010, Altera showed gross margins of 66.7%, 64.5%, 67.1%, 66.8%, and 70.99%, respectively. Also, in those years, respectively, the Company produced EBT margins of 27.98%, 26.7%, 30.66%, 25.56%, and 44.4%. The ROE in 2010 is 45.9%. The current ratio is 5.07, with a D/E of 0.22. In 2010, EPS grew by 196.4%, after falling 28.8% in 2009. ALTR closed 2010 with an EPS of $2.49. Shares currently trade under a P/E of 16.3, and have a 30 day put/call ratio of 1.7. The semiconductors sub-industry has an average gross margin of ROE of 1.10%, D/E of 0.2, and P/E of 14.

Keeping in mind that Altera has a market cap of $12.5 billion, notable peers include NVIDIA (NASDAQ:NVDA), ARM (NASDAQ:ARMH), and Analog Devices (NYSE:ADI). For the year ending January 30, 2011, NVIDIA posted a ROIC of 6.69%, when taking out interest and other income from net income and taking out current liabilities from total assets to determine invested capital. In that year, the Company made $3.5 billion in revenues. For years ending in January in 2011, 2010, 2009, 2008, and 2007, the NVIDIA gross margins were 39.76%, 35.38%, 34.29%, 45.6%, and 42.38%. The respective EBIT margins were 7.65%, -2.47%, -1.25%, 22%, and 16.11%. For the year ending in January 2011, the EPS is $0.43, therefore, NVDA trades under a P/E of 52.6 with a 30 day put/call ratio of 0.6.

In 2010, ARM had a ROIC of 8.58%, when taking out accounts payable and accrued and other liabilities from total assets to come up with invested capital. In 2010, the Company made 406.5 million pounds ($656.26 million) in revenues. For 2010, 2009, 2008, 2007, and 2006, the profit margins were 93.58%, 91.65%, 89%, 89.2%, and 88.27%. Respectively, the EBIT margins were 27.06%, 15.49%, 21.1%, 18.6%, and 21.67%. In 2010, the EPS is $0.299, and so ARMH trades under a P/E of 94.7 with a 30 day put/call ratio of 0.3.

Analog Devices had a ROIC of 23.05%, for the 12 months ending in January 30, 2011. The Company pulled in $2.8 billion in revenues in that same timeframe. The profit and EBIT margins are also 66.27% and 35.06%. Ending in October, profit margins in 2010, 2009, 2009, 2007, and 2006 were 65.16%, 55.5%, 61.07%, 59.67%, and 58.5%. The EBIT margins for those years are 32.65%, 14.76%, 25.79%, 25.88%, and 25.7%. For the trailing 12 months, EPS is 2.65, implying a P/E of 14.8. The 30 day put/call ratio is 0.4.

The market expects higher performance from NVIDIA and ARM relative to ALTR. Assuming a put/call ratio of 1, P/E should be closer to 9.6 for shares of ALTR.

Altera is a global semiconductor company, serving over 13,000 customers within the Telecom and Wireless, Industrial Automation, Military and Automotive, Networking, Computer and Storage, and Other market segments. The Other market segment includes sub-segments of broadcast, consumer, medical and test.

Altera designs, manufactures, and markets a variety of products.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.