Apple Suppliers May Reveal Strong Demand

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

With the holiday season just around the corner, the investment community is buzzing with speculation on how Apple (NASDAQ: AAPL) will perform. With the release of the iPhone 5 and the iPad mini, Apple certainly has the product arsenal to clean up in December. However, recent reports suggest weakness in sales and a possible slowdown in profits, but numbers released by Apple chip suppliers paint a different picture. Unusually strong results from Cirrus Logic (NASDAQ: CRUS) reflect improving demand for Apple products, which may also bode well for other chip suppliers such as Qualcomm (NASDAQ: QCOM).

Cirrus Earnings

Late on Wednesday, Cirrus Logic reported results that blew past Wall Street expectations. Cirrus Logic produces audio chips for a range of Apple products, such as iPhone’s and iPod’s, as well as for a number of other consumer electronics. Second quarter revenue of $194 million generously beat the Street’s estimate of $181 million, which represented a 91% gain from the previous period. Q2 EPS beat by $0.08, and as if all this wasn’t enough, the firm raised its revenue estimate for Q3 to $270-$300 million, versus an analyst consensus of $237.7 million. Gross margin was around 52% in Q2, and is expected to be around 51% in Q3.

Implications for Apple and Qualcomm

Apple is Cirrus’ biggest customer, this quarter accounting for roughly 70% of sales. According to analysts, strong results from Apple suppliers are a good indicator of expected sales strength over the holidays, which should ameliorate some of the fears of Apple slowing down. Indeed, global smartphone shipments were up 45.3% year over year in Q3. These strong results further boosted expectations of other Apple suppliers such as Qualcomm, who produces a number of chips for the iPhone, including the processor.

Qualcomm is the world’s leading producer of smartphone hardware, and supplies to all the world’s major smartphone manufacturers. Q3 results were a bit of a disappointment for investors, with EPS missing by about a penny. The stock is up 13.6% in the last twelve months, which is no doubt partly due to the hype surrounding the iPhone 5. It will be interesting to see if Qualcomm’s report, due today, follows the positive trend set by Cirrus.

Valuations and Metrics

With a P/E of 31.31x, Cirrus looks overvalued at the moment, but the forward P/E is a lot more attractive at around 12x. With a price to book of 5.5, the company is well over the industry average, but the firm has a strong cash position with virtually no debt. Qualcomm’s valuations are a lot more reasonable. The stock is priced at 17.36x earnings, with a forward P/E of 15.3x. The company trades at 3.21 to book, which is more or less on par with the industry. Like Cirrus, Qualcomm has very little debt, but has a noticeably higher gross profit margin of 67.4%. It definitely looks like Qualcomm is the better bargain for those looking to get in on smartphone growth.

Bottom Line

In short, Cirrus’ most recent earnings report is very encouraging for the smartphone market and for its main customer, Apple. Blowing away consensus estimates, the company also raised guidance considerably. This shows high expectations from Apple going into the holiday season. Similarly, these results bode well for other smartphone chip makers such as Qualcomm, who, after a disappointing last earnings release, may be poised to surprise upwards on Thursday.

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DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Cirrus Logic, and Qualcomm. Motley Fool newsletter services recommend Apple. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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