LAS VEGAS -- The Consumer Electronics Show (CES) kicks off here today, bringing together a huge number of technology companies focused on gaining the consumer's attention in a market scaling into billions of devices.
For investors scouting out the scene, the options can be mind-boggling, ranging from the eccentric to the mundane. Waterproof tablet, anyone? Tech backpack? But let's try to boil it down for you -- the best way to make money in consumer electronics (other than buying Apple) is probably on the components, rather than the finished products.
For suppliers catching the right trends, such as smartphones, it's still a fast-growing market with plenty of opportunity. Smartphone subscriber growth, as defined by 3G mobile systems, is growing at a 35% annual rate, according to Mary Meeker, a partner at Kleiner Perkins Caufield & Byers.
The CES is bringing together every major consumer electronics player on the planet, from phone manufacturers to microphone salesmen. But here's an idea for the investor: glass. It's one of the materials that goes into these devices, whether it comes in the form of silicon (chips), LCD units for displays, or the screens themselves.
Think you want to play the consumer electronics boom? The best way is likely the chips and glass that go into your mobile toys. Here are some companies that give you exposure to consumer electronics and happen to have cheap stock prices relative to earnings:
Corning(NYSE: GLW) seems to find its way into every tech bubble, whether it's providing optical fiber or LCD displays. Its proprietary glass products are market leaders in LCD TVs and mobile devices, but the stock got crushed recently on news that Chinese manufacturers were putting pressure on its margins. Shocking!
At the CES, Corning is introducing a next-generation product -- Gorilla Glass 2 -- for the consumer electronics market. The company claims a 20% reduction in thickness. There is no doubt this is a huge market for Corning, since it has its glass in more than 500 products and 500 million units worldwide.
How strong is it?
Corning rep demonstrates Gorilla Glass 2 at CES. (Photo by Curt Harsch)
For investors, however, the most attractive thing about Corning may be its recent correction. The stock is trading at $13.61, almost 50% off its 52-week high, and sports a forward 2012 P/E ratio of only 7. This company earned $3.4 billion in the last 12 months and has a return on equity of 17%. If you are worried about an implosion, think about the tech doldrums of 2009. While some companies were going down the tubes, Corning "only" earned $2 billion of profit that year. That may give you a sense of the floor for the stock. It's hard to see it trading below $10, and it feels like a bargain here.
Qualcomm(Nasdaq: QCOM) is the Goliath in the mobile chip sector. But more importantly, its unique wireless technology patent portfolio allows it to collect licensing fees on millions of devices. Qualcomm is also making an aggressive push into tablet computing, which also needs wireless chips. Meanwhile, Intel Corp. (Nasdaq: INTC) is struggling to make headway in the mobile market.
I don't think Intel's going to gain on Qualcomm in this sector. Qualcomm's too good, and I think it's got some big design wins coming in Asia. For the long term, Qualcomm's one of the safest tech plays on earth. It trades at a forward multiple of 14 on 2012 earnings. With a return on equity of 18% and annual earnings growth of about 23%, it's not an expensive stock.
SanDisk Corp. (Nasdaq: SNDK) Think memory. SanDisk, the memory chip maker, remains one of my favorite tech component plays. The biggest problem for SanDisk, whose biggest product is flash memory, is that it has little control over the supply of memory to
Apple Inc. (Nasdaq: AAPL), which has been aggressive in controlling memory manufacturing, so that it can charge a premium. Apple also has a track record of trying to cut suppliers out of the loop (more on that later). But that's OK, because even if SanDisk can't have all of the Apple market, there are hundreds of millions of other devices out there.
Another issue for SanDisk is the fear that the flash memory business is being commoditized, which would continue to pressure margins as prices fall. But I think this fear is overdone, because the market is still growing very fast, and there are many years to go. If you haven't noticed, I like companies with huge profits, great balance sheets, and low P/E multiples, and SanDisk has all of those. It made $1.2 billion in the last 12 months. It has $2.6 billion in cash on the balance sheet, a return on equity (ROE) of 20%, and a forward P/E of 10. Remember our IU investment rule about picking stocks with a lower P/E than either their growth rate or ROE? Sandisk meets these criteria.
OmniVision Technologies Inc. (Nasdaq: OVTI) has been clubbed recently. The company makes specialty chips for mobile devices, including camera and imaging chips. Recent pre-announced downward earnings revisions have caused the stock to plunge more than 60% off its highs. In addition, OmniVision has been plagued by rumors that Apple is pushing it out as a supplier of screen illumination chips. Though OmniVision still has a healthy business in camera chips with Apple, the computer maker recently starting double-sourcing its illumination chips to Sony.
But let's calm down. OmniVision had a bad 2011, but it now trades at a P/E of 5. Its products shipped to more than 150 million devices in the second quarter of last year. Most market research firms expect the mobile smartphone market to climb to 1 billion units in the next few years. OmniVision sells plenty of parts into an enormously growing market.
This stock is so cheap that it discounts many bad things that are happening. We'll look for it in the mix at the CES. Despite its recent stumbles, OmniVision has a one-month ROE of 20%. It's got $465 million in cash, only $50 million in debt, and a $740 million valuation. In other words, more than half its market valuation is cash. Really.
If the CES just bores you, maybe you should join Apple, which sits the show out -- or buy it. Apple shuns big industry trade shows, because it's more interested in running its own show. That's also how it treats its suppliers. But it's still the bellwether of the mobile device space. We've told you several times that it was cheap, and it finally looks ready to hit new highs. Apple's stock has been trading recently at $423. (Its 52-week high is $426.) The company has a P/E of about 15. It's not as cheap as it was six months ago, when I told you it was cheap, but it's still a must-own stock if you want to play the consumer electronics space.
Those are the bargains I see in electronics. I'll be on the CES floor in the next few days checking out trends and product launches, and I'll be reporting back daily.
Great advice to look inside the products rather than be caught with all the flash of what is tossed out in front of you. since a lot of the big companies provide parts to a lot of different devices they are protected from some of the ups and downs.
From the consumer standpoint, it looks like connectivity is going to be a big deal as people look for new ways to drag video back and forth between screens.
Thanks for the pointers, Scott. It's amazing that these electronic components, that the average consumer probaby pays no attention to, generate so much revenue.
Thank you Scott for the information. I also think it's a good idea to have a look at the suppliers of components that are in demand. Your list looks very comprehensive. Looking forward to hearing more about the technology show from you.
I too like the idea of looking inside the device. One chip supplier that's shown up on a dividend-paying screen is Linear Technology. I don't know much about it, but some of the numbers look good.
Linear Technology Corp. is a specialized semiconductor company. LLTC has a $6.91B market cap and pays a dividend yield of 3.16%. It has a payout ratio of 39.08%. Over the last five years, LLTC's EPS has grown by 12.77%. It is expected to grow by 12.24% over the next five years. LLTC has a low beta of 1.06, meaning it is marginally more volatile than the market. It is currently trading at $30.15 a share
LLTC pays a 3.5% dividend which is nice. I don't know enough about the near-term catalysts in the market to comment on whether CES will have any direct impact. I can look into it though.
@Scott, thanks for the post. I feel Corning is a good buy at these level. In CES 2012 Lenovo today announced Google Android TV. Do you think Google will use Android TV to earn ad-revenues ?
So far, Google has little traction in TV. So I'd wait to see how it progresses. The market hasn't been impressed over the announcement -- the stock traded down 4% today.
That being said, GOOG at a P/E of 14 and PEG of 1 isn't price expensively, either.
I know that google has not been seen in the greatest of light with regards to their attempts at penetrating the TV market, but I think that will change. They have the platform and the content to make a real go at it.
Scott- this is a good list of component suppliers. If you look more deeply, there are chip makes like ARM ( although Quallcomm is also here) and the not to be forgotten contract manufacturers. It seems the end of the value chain ( facing the consumer) is the hardest to make money in.
tokyogai -- got any others that interest you? I am actually making a list I would like to start working on some reports about the smartphone supply chains.. we have access to some proprietary research.
I like flextroncs ( FLEX) . Foxconn is larger, but I think slightly over valued. In the passives area I like Molex ( MOLX). Texas Instruments and ARm Holdings ( ARMH). These will all benefit from a recovery and are the components behind the products.
I watched the Corning Gorilla Glass 2 demo today and it was pretty impressive. The stuff did not break, even when an audience member tried to break it with a hammer and nail.
If they can really make the glass stronger and thinner -- and enable tablets and phones to be even thinner and lighter -- it looks like a winning substance.
Apparently analysts think the same thing. I read that KeyBanc Capital Mkts just initiated coverage of Corning, largely because of this glass. It's used in something like 575 products and Corning claims it's working on molding Gorilla Glass into three-dimensional (3D) shapes.
@Scott, I am reading lot of positive reviews about Windows Nokia mobile. Do you think its the right time to enter Microsfot and Nokia shares ? And do you think the the success of Windows mobile will affect the sales of iPhone ?
I've been optimistic on MSFT for a while. With the dividend and the low valuation, it just needs some upside in Windows phone or Windows 8 to push the stock up. It certainly hasn't been an exciting stock -- it barely moves, so you have to be patient enough to just collect the dividend and wait. As for Nokia, a little more risk but any upside with the new partnership should reward investors.
I like Nokia. Nokia builds high quality phones. But the company lagged in terms of a competitive OS. The question is whether consumers will be willing to migrate to even the nicest alternatives to iPhones now that the bulk of the accessory market is directed to the Apple market.
I had a chance to play with the new Nokia Lumia 900, and it's a beautiful phone. t has a 4.3-inch screen, compared to the Lumia 800, which has a 3.7-inch screen. (both are 800 x 480 pixels). It has a 1.4-gigahertz Qualcomm processor, 512 megabytes of RAM, 16 gigabytes of built-in storage, an 8-megapixel rear camera that can shoot up to 720p video and a 1.3-megapixel front facing camera for video chatting.
People who were testing it seemed to like it. The MSFT partnership may be the deal that turns Nokia around.
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