5 Disturbed Component Makers: Compelling Buys, Or Value Traps? – Intel Corporation (INTC)

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Apple Inc. (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, Inc. (NYSE:JBL), Texas Instruments Incorporated (NASDAQ:TXN) , Advanced Micro Devices, Inc. (NYSE:AMD), and Intel Corporation (NASDAQ:INTC).

Intel Corporation (NASDAQ:INTC)Financial ratios for these companies follow:

JBL Jabil Circuit 10.84 0.23 95.15 0.8 10.8%
INTC Intel 9.84 1.96 NA 0.26 9.4%
AAPL Apple 9.97 2.51 9.43 NA 13.8%
AMD Advanced Micro Devices NA 0.37 NA 3.8 2.7%
ARMH ARM Holdings 79.13 21.77 NA 0.09 22.7%
TXN Texas Instruments 21.72 2.87 17.51 0.52 9.5%

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.

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.”

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