5 Disturbed Component Makers: Compelling Buys, Or Value Traps?

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

Apple (NASDAQ: AAPL) and the rise of mobile devices have disturbed computer component makers. The stocks of many of these component manufacturers are trading at low valuation multiples. Are these stocks compelling opportunities for investors, or are they value traps? Below, I will examine Apple and component makers Jabil Circuit (NYSE: JBL), Texas Instruments (NASDAQ: TXN), Advanced Micro Devices (NYSE: AMD), and Intel (NASDAQ: INTC).

Searching for Value

Financial ratios for these companies follow:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/</span><span>FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> <td> <p><strong><span>Growth Next 5 Years</span></strong></p> </td> </tr> <tr> <td> <p><span>JBL</span></p> </td> <td> <p><span>Jabil Circuit</span></p> </td> <td> <p><span>10.84</span></p> </td> <td> <p><span>0.23</span></p> </td> <td> <p><span>95.15</span></p> </td> <td> <p><span>0.8</span></p> </td> <td> <p><span>10.8%</span></p> </td> </tr> <tr> <td> <p><span>INTC</span></p> </td> <td> <p><span>Intel</span></p> </td> <td> <p><span>9.84</span></p> </td> <td> <p><span>1.96</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.26</span></p> </td> <td> <p><span>9.4%</span></p> </td> </tr> <tr> <td> <p><span>AAPL</span></p> </td> <td> <p><span>Apple</span></p> </td> <td> <p><span>9.97</span></p> </td> <td> <p><span>2.51</span></p> </td> <td> <p><span>9.43</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>13.8%</span></p> </td> </tr> <tr> <td> <p><span>AMD</span></p> </td> <td> <p><span>Advanced Micro Devices</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.37</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>3.8</span></p> </td> <td> <p><span>2.7%</span></p> </td> </tr> <tr> <td> <p><span>ARMH</span></p> </td> <td> <p><span>ARM Holdings</span></p> </td> <td> <p><span>79.13</span></p> </td> <td> <p><span>21.77</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.09</span></p> </td> <td> <p><span>22.7%</span></p> </td> </tr> <tr> <td> <p><span>TXN</span></p> </td> <td> <p><span>Texas Instruments</span></p> </td> <td> <p><span>21.72</span></p> </td> <td> <p><span>2.87</span></p> </td> <td> <p><span>17.51</span></p> </td> <td> <p><span>0.52</span></p> </td> <td> <p><span>9.5%</span></p> </td> </tr> </tbody> </table>

There are many companies on this list that are cheap on the basis of earnings multiples. Apple, Intel, and Jabil Circuit are all trading at attractive price-to-earnings multiples. Jabil and Intel are both very cheap and are on opposite sides of the struggle for dominance being waged between personal computers and mobile devices. They are both nearly as cheap as Apple on a price-to-earnings and are much cheaper on a price-to-sales basis.

The only company on this table that rival’s Jabil Circuit’s low price-to-sales ratio is Advanced Micro Devices, but it is having issues establishing profitability and has a high level of debt financing.

Texas Instruments Results

Texas Instruments predicts fiscal first-quarter sales between $2.69 billion and $2.91 billion, blaming lackluster demand from electronic-device makers as they postpone orders and keep inventories low. According to Bloomberg data, $2.89 billion is the average estimate from analysts.

The economic recovery had not been broad enough to lift demand and earnings at Texas Instruments. Net income for the fourth quarter fell to $298 million, or 25 cents per share, from $264 million, or 23 cents per share for the same period a year earlier. Texas Instruments’ Chief Executive Officer Richard Templeton said, “We continue to operate in a weak demand environment. Our visibility into future demand remains limited as our lead times are short and our customers are reluctant to commit to extended backlog.”

In November last year, the largest maker of analog chips announced plans to shed 1,700 jobs to save around $325 million in costs as the company shifts away from producing digital chips for tablets and mobile phones, although such an exit would also trim about $135 million from the first quarter sales.

Texas Instruments noted that its customers’ inventories are kept at low levels, and may have to place orders on short notice. Chief Financial Officer Kevin March said, “Even the slightest uptick in their end-demand and they are going to be caught short. Everybody’s going to have to replenish.”

Clearly lackluster guidance does to not justify the P/E multiples of Texas Instruments being about twice that of Apple, Jabil, and Intel.

AMD 4th Quarter Results

Advanced Micro Devices’ story also fails to distract attention from its more reasonably financed, cheaply-valued peers. Hopes that server chips may salvage the company’s future are not enough to overwhelm concerns over its high levels of debt.

Advanced Micro Devices reported fourth-quarter sales of $1.16 billion that topped analysts’ average estimate of $1.15 billion. The company’s sales of server chips helped the firm exceed expectations. However, AMD still took a loss of $102 million for the quarter, equivalent to 14 cents per share and lower than the 18 cents predicted by analysts.

Amid the shrinking market for personal computers brought by consumers’ fascination with tablets and smartphones, the second-largest maker of PC processors is trimming its workforce and selling assets to raise cash for new products. AMD seeks to incorporate technology from ARM Holdings into its processors for servers to take a bigger share of the server chips market from Intel. Intel currently controls 96% of the market compared to AMD’s meager 4%.  Even if the company managed to increase its revenue from processors for servers that run data centers, its share price dropped 56% last year.

AMD sees a silver lining in the surging demand for smartphones and tablets, as this also increases the need for data and application servers that provide mobile data and cloud computing space. Chief Executive Officer Rory Read said, “There’s a tsunami of devices that are beginning to emerge, and they’re connected on a cloud.”

The gross margin for the past quarter decreased to 39% from 46% in the fourth quarter of 2011, when the company still had operating profit of $138 million, or 19 cents per share, out of $1.69 billion sales. First quarter revenue is forecasted to be in the range of $1.02 billion to $1.09 billion, a 6% to 12% decline from the previous quarter, according to Bloomberg. AMD has struggled as sales of PC processors continued to decline, bringing its cash reserves and equivalents down to $549 million from $776 million.

In order to preserve cash by reducing expenses, AMD reduced orders from its supplier Globalfoundries last month, maintaining reserves including cash equivalents plus marketable securities at $1.2 billion by the end of 2012. Newly appointed CFO Devinder Kumar predicts that the company would be back to generating cash from operations by the second half of this year.

Changes at Intel

After serving the company for almost four decades, Intel’s president and CEO Paul Otellini said he would resign as of May 2013. For the last eight years Mr. Otellini was Intel’s CEO.

Intel recovered from a 42% drop in earnings in 2006 Under Otellini’s leadership. Since 2010 Otellini achieved record sales and profit for Intel, largely by taking market share from AMD.

Otellini could have remained Intel’s CEO until May 2016 when he would have hit the firm’s mandatory retirement age. His decision to retire could have been based on market-surprising problems that either he or the board did not want him to manage, though it is also possible that he simply just wants to retire.

Supplying Apple Isn’t Easy

Apple is weighing replacing Intel processors in its Mac computers with the kinds of chips that it uses in its iPad and iPhone devices. This could make it easier for engineers to develop similar features for iPhones, iPads, and Macs. In the past several years, Apple has integrated ARM Holdings technology into its iPhone and iPad. ARM licenses chip designs and technology to various phone chip companies.

Jabil is an Apple component supplier. iPhone 5 supply constraints might delay payback from Jabil’s investment in facilities that help the manufacturer make components which could readily meet the high standards Apple demands for every component. This does a number on a supplier’s margins. Apple’s tough requirements for high quality iPhone 5 casings may be increasing costs.

Conclusion

Intel, Apple, and Jabil are buy candidates for long-term investors. Jabil and Apple shareholders could benefit from it sales growth from mobile device growth. Intel’s future is less clear, though it is trading at low enough valuations to make it an interesting buy candidate. Investors should avoid Texas Instruments and AMD at this time. 


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. 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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