Value Investing in Apple Suppliers
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Successful tech companies like Apple (NASDAQ: AAPL) typically trade at a high price-to-earnings ratio, and Apple's ratio of 15 continues to attract attention from value investors. Investors who are confident about Apple, which I am, recognize that high sales of the next generation iPad and iPhone will also improve the growth prospects of Apple's suppliers. One of these suppliers, Cirrus Logic (NASDAQ: CRUS), presents value investors with a very attractive deal, as it currently has a price to earnings ratio of 9.16.
Even with this relatively low ratio, Cirrus Logic still trades near the top of its annual range, as other investors recognize the potential of the chip manufacturer. The company reported much better earnings and revenue results in fiscal year 2011, improving its revenue from $221 million to $370 million and improving its net income from $38 million to $204 million. Shareholders' equity doubled during the year, increasing from $219 million to $438 million. Although the company did lose money in fiscal 2008, it more than made up for its losses during the next few years.
Cirrus Logic's increasing research and development costs may help the company introduce new, higher-margin products, rather than improving earnings simply by reducing costs. Cirrus spent $64 million on research and development in 2011, and $51 million in 2010. Cirrus reported a 55 percent gross margin in fiscal 2011, higher than its 54 percent margin in 2010 but lower than its 56 percent margin in 2009, so the R & D expenses did not prevent the company from maintaining its margins.
Cirrus reports a growing dependence on Apple on its 2011 annual report. Cirrus states that sales to Apple made up 47 percent of its revenue in fiscal 2011, but only 16 percent in 2009. This dependence increased further in 2012 as Cirrus reported that during the first three quarters of fiscal 2012, Apple provided 62 percent of its revenue. Although Cirrus' strong performance mostly occurred because of Apple, it can use its Apple income to support research into other product lines. LED lights have gained popularity because of their energy efficiency benefits, and Cirrus designs chips that give LED lamp owners more control over the brightness of their lamps.
TriQuint Semiconductor (NASDAQ: TQNT) has a price to earnings ratio of 20.48, which is higher than both Cirrus and Apple, although not unusual for a tech company. TriQuint reported higher sales in fiscal 2011, improving its revenue from $879 million to $896 million, but its income dropped substantially. Triquint reported $191 million in net income for fiscal 2010, which fell to $48 million in fiscal 2011. Triquint's gross margin also fell, from 41 percent to 37 percent.
Broadcom (NASDAQ: BRCM) also shows value potential as an Apple partner. Broadcom's current price to earnings ratio is 20.94, although Broadcom reported asset impairment, donations, and lawsuit costs in 2011 that it doesn't expect to increase its operating costs in 2012. Broadcom does not depend as heavily on Apple as Cirrus does, as 11 percent of its sales came from Apple in fiscal 2010 compared to Cirrus' 35 percent in that year. Broadcom is a safer investment for an investor who is concerned about Apple's downside risks, while still retaining the ability to capitalize on Apple's growth.
Broadcom and Cirrus both look like they will perform well if Apple continues to release popular mobile devices, and I suggest purchasing both stocks because they offer good value, as well as Apple itself. I don't recommend buying Triquint, as its recent performance was weak.
Motley Fool newsletter services recommend Apple. The Motley Fool owns shares of Apple, Cirrus Logic and TriQuint Semiconductor. enovinson has no positions in the stocks mentioned above. 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.