If you believe most stock prices are going to rise because inflation is going to drop and long term interest rates are going to move from 4% to 2%, then should you buy stocks? Well, if that's your only reason, then you should buy long term bonds which will appreciate in price if you are correct and, indeed, interest rates do fall.
Similarly, if you believe Apple Inc.'s (NASDAQ:AAPL) suppliers are going to do extremely well because Apple's sales are going to soar, then should you buy Apple suppliers? Again, it would make sense that first you buy Apple shares.
Naturally, there are exceptions-- what if Apple shares have already moved higher and captured such expectations at current market prices, while Apple suppliers' shares are lagging behind? In such a case, it makes sense to buy Apple suppliers. But is that the case with Apple shares and the shares of its suppliers?
Apple shares have already soared 49.6% year-to-date from $405 on 12/30/2011 to $605.96 on 3/20/2012. The shares of three Apple suppliers have also done quite well: Skyworks Solutions Inc. (NASDAQ:SWKS) shares are up 74.29% from $16.22 to $28.27, Qualcomm Incorporated (NASDAQ:QCOM) shares are up 22.5% from $54.51 to $66.75 and Broadcom Corporation (BRCM) shares are up 31.1% from $29.28 to $38.39.
1. 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 Apple's products-- including the iPhone 4-- and are also expected to be used in the future iPhone 5.
Skyworks Solutions Inc. 1-Year Stock Price Chart
Source: Yahoo Finance
With earnings estimates at $1.87 for current fiscal year and and $2.07 for next fiscal year, Skyworks' forward PE ratio stands at 15.1 and 13.7 respectively. Hence, despite 74% appreciation in its share price, Skyworks' PE ratio is not unreasonable, although it may be considered on the high side for its industry.
Skyworks beat its earnings estimates by about 2% during the past two quarterly earnings releases. However, we believe that unless it beats its earnings estimates of $0.40 for this quarter by more than 6%, it will have difficulty rising much further in the near term, and investors may consider booking profits at these levels, while it may be preferable to actually own Apple shares than to own Skyworks.
2. Qualcomm Incorporated
Qualcomm Incorporated provides wireless technology and services, including CDMA technologies, powering the majority of today's 3G devices. Qualcomm chips are used by Apple in many of its products including the iPhone 4S, as well as the iPad.
Qualcomm Incorporated 1-Year Stock Price Chart
Source: Yahoo Finance
With earnings estimates at $3.75 for current fiscal year and and $4.15 for next fiscal year, Qualcomm's forward PE ratio stands at 17.8 and 16.1, respectively. Such ratios are on the high side for its industry, although many analysts are expecting Qualcomm's earnings to actually be substantially higher than the stated estimates. Recent reports by Reuters indicate that Barron's expects Qualcomm shares to increase by 30% in the coming year due to growth in the smartphone and tablet markets.
Qualcomm did indeed beat its earnings estimates by 7.8% during last quarter, as it also beat its earnings estimate for the quarter ending in March 2011 by 7.5%. It is interesting to note that although Qualcomm ran up in price into the end of March 2011, its share price actually dropped and traded sideways until early 2012. Given its pricey PE ratio, we believe that Qualcomm would have to beat its earnings estimates by more than 8% for this quarter in order to be able to maintain its forward momentum in the short term. However, there is a good likelihood it may very well do so, depending on Apple's sales figures. Again, if the trigger is Apple, then one may as well own Apple shares.
3. Broadcom Corporation
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 chips are used in Apple products, including the iPad (where it handles wireless and bluetooth), and iPhone.
Broadcom Corporation 1-Year Stock Price Chart
Source: Yahoo Finance
With earnings estimates at $2.89 for current fiscal year and and $3.22 for next fiscal year, Broadcom's forward PE ratio stands at 13.3 and 11.9 respectively. Such ratios are quite reasonable, especially considering any upside potential from exceeding earnings expectations.
Although Broadcom only beat its earnings estimates for the last quarter by about 4.6%, in the quarter ending March 2011, it beat its estimates by over 15%. However, one year ago, Broadcom shares did slide between April and June, and then traded mostly sideways until recently (with an additional dip at end of Q4 2011). Given its reasonable PE ratio and earnings upside potential relating to Apple's fortunes, Broadcom does continue to be attractive to buy at these levels, despite its appreciation of 31.1% year-to-date.
All three Apple suppliers examined-- Broadcom, Qualcom and Skyworks-- do look attractive in the intermediate term when examined on their own. However, when compared to Apple's forward PE ratio of 13.99 for the current fiscal year and 12.46 for next year, and if an investor is considering buying them based on Apple's good fortunes, then-- with the exception of Broadcom-- an investor may as well buy Apple and Broadcom for now, while awaiting the current quarter's earnings release.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.