Buy Apple's Suppliers: Checks Indicate Profits Are Soaring

by: Helix Investment Research

Anyone who receives alerts from Seeking Alpha about Apple (NASDAQ:AAPL) knows that it is the most widely discussed stock on this website. Article after article extols the virtues of the company and how fantastic of a buy it is. Occasionally, someone writes a bearish article arguing that the company's best days are behind it (those are actually far more interesting to read). We think that instead of writing another article about how Apple is about to report the best quarter ever, it is better to write about which companies can benefit from Apple's largesse.

Apple has always been known for its secrecy, and that secrecy extends to its relationships with suppliers. Suppliers are banned from ever directly revealing that Apple is a customer. And suppliers are perfectly willing to do that, for Apple is an extraordinarily profitable customer to have due to the sheer volume of business it brings in. For example, Apple alone buys 23% of all flash memory, bringing billions into supplier's coffers, and allowing Apple to expand its margins.

However, recent initiatives have allowed us an unprecedented look at Apple's supply chain. Facing pressure over working conditions in its suppliers' factories, Apple has, for the first time, released a comprehensive list of its suppliers. The list is part of a broader report released by Apple that looks into the labor, environmental, and business practices of its suppliers.

Apple reports its results on January 24, and by all measures, it should be a record quarter. Apple is not the only company to benefit from the success of its iDevices. Many suppliers will also benefit and see a jump in their stock prices after Apple releases its earnings. We have already seen how powerful of a force this is. Multi-Fineline Electronix (MFLX), a circuit board maker, saw its shares soar more than 18% after it pre-announced better than expected revenue for the quarter. 66% of Multi-Fineline's orders come from a "single unnamed customer," and it is no secret which California fruit company is that customer. Given that Multi-Fineline had a weak quarter alongside Apple's third quarter, it is clear that Apple is the key customer for this company. Multi-Fineline also gave a better than seasonal outlook, which should indicate that demand for iPhones is strong. The supplier list Apple released confirms that Multi-Fineline Electronix is an Apple supplier.

Cirrus Logic (NASDAQ:CRUS), whose audio codec chips are in the iPhone, pre-announced better than expected revenues for the quarter ($122 million vs. consensus of $105.1 million) and guided this quarter's revenues higher as well ($105 million vs. consensus of $98.5 million). While Cirrus Logic is of course banned from discussing Apple, it is able to say that its largest customer accounts for almost 60% of its revenues. Given that Cirrus Logic's chips have been found in the iPhone, and that Cirrus Logic itself states that its chips are in all of its largest customer's devices, it is obvious that Apple is that customer.

Paradoxically, Apple's supplier list does not include Cirrus Logic. We speculate that this is due to the fact that the components are unbranded, and that Apple buys the chips through multiple contractors, meaning that Cirrus Logic does not supply Apple directly. Given the positive comments from Multi-Fineline Electronix and Cirrus Logic, we expect all of Apple's suppliers to do well this quarter.

Below we profile 4 other suppliers that will benefit the most from Apple's record quarter and continued growth in sales of iPhones, iPads, and iPod Touches. While this in no way covers Apple's entire supply chain, these companies all supply components for iPhones, iPads, and iPod Touches, for that is where the upside lies. We concentrate on suppliers who have a higher proportion of their business come from Apple. Texas Instruments (NYSE:TXN), for example, may have a good deal of business at Apple, but that business is not meaningful enough relative to the rest of its divisions. The same goes for companies like Flextronics (NASDAQ:FLEX) and NVIDIA (NASDAQ:NVDA).

  1. Broadcom (BRCM): Of all the suppliers Apple has, none is more levered to the company than Broadcom. Data compiled by Bloomberg shows that Apple accounts for 11% of sales at Broadcom, making Apple its largest customer. While Broadcom has a very diverse customer base, we believe its presence at Apple has allowed Broadcom to maintain its earnings and sales forecasts at a time when peers like Texas Instruments and Altera (NASDAQ:ALTR) are cutting their forecasts. Broadcom's chips are found in every "iDevice" and its technology is too crucial to be replaced with another company's products. Broadcom reports its results on January 31, and the consensus estimate calls for the company to report record earnings per share of 65 cents on revenue of $1.8 billion. Given the positive announcements we have seen, it is entirely possible that Broadcom can beat consensus estimates. The key challenge will be for growth in business at Apple to more than offset a reduction in business at Broadcom's other customers, such as Nokia (NOK). Given the strong uptake of the iPhone 4S at Verizon (VZ) and Sprint (S) it does seem doable for Broadcom to beat consensus estimates for the quarter.
  2. ARM Holdings (ARMH): While ARM Holdings may not be a direct supplier of Apple, its processor technology is present in every iDevice. In addition, ARM's chips are present in virtually every smartphone and tablet. ARM tends to trade in tandem with Apple post-earnings. Should Apple report a great quarter (as we expect it to), shares of ARM Holdings should rally given that Apple is growing sales of ARM-based devices faster than any other company. ARM Holdings is currently expected to post record profits and revenues for the quarter, earning 14 cent per share on revenues of $195 million.
  3. Qualcomm (QCOM): Qualcomm is a relatively new supplier to Apple, but it is one that is key to the company. When launching the iPhone 4 on Verizon (NYSE:VZ), Apple had to customize the networking chips in that model to make it compatible with Verizon's CDMA network. Enter Qualcomm. Qualcomm chips are the de facto standard in CDMA technology, and the chips have been found in the iPhone 4, and Qualcomm is listed as an Apple supplier. The iPhone 4S is able to connect to both CDMA and GSM networks because of Qualcomm technology, and increasing uptake of it at Sprint and Verizon, as well as a launch on China Telecom (NYSE:CHA), should provide upside to consensus estimates. Qualcomm is currently expected to post record profits and revenues for the previous quarter, earning 90 cents per share on revenues of $4.5 billion.
  4. Skyworks Solutions (NASDAQ:SWKS): Because Skyworks is posting its earnings on January 19, 5 days before Apple, its results should provide further proof of strong iDevice sales. Apple has confirmed that Skyworks is a supplier, and a teardown of the iPhone 4S clearly shows Skyworks amplifier chips. Skyworks's investor presentation is very coy about the company's relationship with Apple, in keeping with the supply chain tradition of secrecy. In its list of smartphone manufacturers it counts as clients, Apple is nowhere to be found, yet Skyworks takes great care to underline the fact that it serves ALL the major smartphone manufacturers. However, now that Apple has outed Skyworks as a supplier, there is little sense in hiding that fact. Like the previous three companies, Skyworks is projected to post record profits for the last quarter, earning 50 cents per share on revenue of $389.6 million (just shy of a record). Skyworks' commentary and forecast will also allow investors in Apple to get a more accurate read on Apple's current quarter, as Apple's "guidance" is always sandbagged into irrelevance.

Disclosure: I am long AAPL, BRCM, QCOM.