Alternatives to Samsung, Apple and Nokia

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investing in the smartphone manufacturers hasn’t been the most glamorous venture. Over the past year alone, almost every major handset manufacturer experienced a rapid decline in value.

Source: Statista

Investors who don’t want to pick winners and losers in the space, or aren’t certain of the market saturation at the high- or low-end may do better by investing further upstream.

How to position

Investing in the phone companies themselves could be a bit of a chore. Some companies have glaring flaws (Blackberry) while some have been able to pick up on favorable business opportunities (Nokia). Cherry picking could go wrong in this environment, and it is always smart to have a back-up plan.

I believe that this portfolio may be a winner. It still has exposure to mobile, but the way it is positioned could be more profitable.

Source: Ycharts

Corning’s (NYSE: GLW) gorilla glass technologies are in all smartphone and tablet devices. The company’s growth is sector driven, so if demand for all smartphone and tablet devices continues to grow, the company’s performance should remain largely on track.

I included Qualcomm (NASDAQ: QCOM) largely because of the fact that the company has a dominant position in systems with chips. Almost every handset runs on Qualcomm’s 4G LTE technology, and because of built-in obsolescence, it is highly likely that the technology will advance to 5G prior to the patents expiring, giving Qualcomm a very effective barrier of entry.

Taiwan Semiconductor Manufacturing (NYSE: TSM) is a safe bet because the company is a third party manufacturer of integrated circuits. Its exposure to mobile is largely sector driven. If demand for phones in general were to go up, then the demand for Taiwan Semiconductor Manufacturing’s services will go up. The risk is largely dispersed, which may be something investors are looking for.

The details on Corning

For the most part, the company seems to be largely on track. In the first quarter, the company reported that its gross margin has improved by 1%. The company followed that with a 1% year-over-year decline in sales, general and administrative expenses. The company was able to grow core sales by 7% year-over-year (the company has a diversified set of businesses). As a result of cost-cutting, along with modest revenue growth, the company was able to grow net income by 15%.

The company is currently on the third version of its Corning Gorilla Glass. It is supposed to be the most damage resistant, thin layer of glass available for smartphones. The company believes that this segment will be able to grow by 5% in the second quarter of 2013. However, the company is mentioning the second quarter and not the full year (holiday season tends to have higher consumer discretionary spending).

Analysts on a consensus basis anticipate the company to grow earnings by 12% per year over the next five years. The company compensates investors with a 2.75% dividend yield. The stock trades at a 12.6 price-to-earnings multiple. The stock seems slightly undervalued relative to its projected growth and dividend.

Why you should add to Qualcomm

The company was recently able to secure a significant design win with its Qualcomm Snapdragon 800 chipset against major competitors like Intel and NVIDIA.

Ashraf Eassa from Seeking Alpha estimates:

"The Z2760 ("Clover Trail") scored 2439. Multiplying this figure by 4.7 yields an estimated score of 11463, which suggests that the Qualcomm part sports 71% greater graphics performance than Intel’s upcoming Z3770. While Intel's own comparisons suggest that in terms of CPU performance, it will have a healthy lead over Qualcomm."

That being the case, the company operates at overwhelming economies of scale. The price of a Snapdragon 800 is likely to be $20. Based on that estimate, it is unlikely that competitors like Intel can easily walk in and ramp up production at the same price point without having a significantly negative impact on earnings.

Qualcomm has a competitive moat. Analysts remain fairly optimistic and are willing to forecast that the company will grow earnings by 18% per year over the next five years. The company also compensates investors with a 2.33% dividend yield. The stock trades at a 16.7 price-to-earnings multiple. The stock seems slightly undervalued and is less exposed to competitive risks when compared to Apple and Samsung.

Taiwan Semiconductor a well thought out bet

At the end of the day, all of these companies need to go somewhere for integrated circuits. Taiwan Semiconductor has some of the most competitive prices in the foundry space. The company currently estimates that it has 45% market share in the foundry segment. Other competitors include Samsung, Global Foundries and Intel.

Taiwan Semiconductor believes that it has a competitive advantage over Samsung and Intel. Because it is purely a foundry model and it is not at a conflict of interest with its customers. Because of this, Apple is transitioning its manufacturing over to Taiwan Semiconductor Manufacturing from Samsung.

Analysts project that Taiwan Semiconductor Manufacturing will grow earnings by 15% per year over the next five years. The company compensates its investors with a 2.85% dividend yield. The stock trades at a 16.2 price-to-earnings multiple. The company is slightly undervalued relative to its earnings growth and dividend.

Conclusion

Investing in components makers rather than handset makers could be a better investment thesis. The component makers are less exposed to competitive risk and have better control over costs. Corning, Qualcomm and Taiwan Semiconductor Manufacturing seem slightly undervalued relative to future growth. Because of this, I believe that investors should consider investing further upstream.

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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Corning. The Motley Fool owns shares of Corning and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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