Apple-China Mobile Deal Points to Some Winners Among Semiconductor Stocks

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The obvious benefits to Apple Inc. (NASDAQ: AAPL) and China Mobile Ltd. (NYSE: CHL) from the deal announced Sunday night also trickle down to semiconductor makers that supply Apple with memory and RF chips for the iPhone. We have already written about the planned spread of China Mobile’s 4G (TD-LTE) network from 16 Chinese cities at the end of this year to 340 cities by the end of next year. That network build-out will add millions of potential iPhone customers from among China Mobile’s 763 million subscribers.

The vast new potential will also be a positive for Apple’s chip suppliers, and the analysts at Sterne Agee issued a note Monday morning outlining the impact on several of those suppliers. Here is a look at these stocks and the potential upside to their share price over the next year. All of the stocks are Buy-rated by the Sterne Agee team.

Avago Technologies Ltd. (NASDAQ: AVGO) has a Sterne Agee price target of $65.00 and closed on Friday at $51.65 in a 52-week range of $30.57 to $54.54. The upside potential is 25.8%. The Thomson Reuters consensus estimate for fiscal 2014 earnings per share (EPS) is $3.34 and the 2015 EPS estimate is $3.81. The 2015 price-to-earnings (P/E) ratio works out to 13.56, and Sterne Agee sees a “secular tailwind” for the stock from a variety of drivers. The stock was trading down about 5% in premarket trading Monday morning.

NXP Semiconductors N.V. (NASDAQ: NXPI) not only makes parts for the iPhone, but will benefit from the build-out of China Mobile’s base station infrastructure. The wireless carrier plans to support more than 500,000 base stations by the end of 2014, up from around 200,000 today. The stock closed on Friday at $43.52, in a 52-week range of $24.66 to $44.75. Sterne Agee’s price target on the stock is $50.00, yielding an upside potential of 14.9%. The consensus estimate for the 2014 fiscal year is $4.07, and the forward multiple at that level is 10.69. Shares were up 3.3% in premarket trading this morning.

Qualcomm Corp. (NASDAQ: QCOM) was trading about 1.1% higher in Monday’s premarket, having closed at $72.91 on Friday in a 52-week range of $59.02 to $74.19. Sterne Agee estimates that every iPhone 5s uses $3.40 worth of Qualcomm parts and every iPhone 5c uses $2.90 worth. That should be enough to drive significant revenues based on Sunday’s deal. The investment firm’s price target on Qualcomm stock is $75, leaving a potential gain of just 2.9%. The consensus EPS estimate for next year (FY 2015) is $5.60, and the company’s forward P/E ratio is 13.02.

Micron Technology Inc. (NASDAQ: MU) benefits by the demand for more of its mobile DRAM in the iPhone 5c. Micron’s stock closed at $22.17 on Friday, in a 52-week range of $6.07 to $23.67, and shares were trading down about 3.4% in Monday’s premarket. The Sterne Agee price target on the stock is $26.00, yielding a potential upside of around 17.3%. The consensus EPS estimate for FY 2015 is $2.29 and the forward multiple is 9.68.

Skyworks Solutions Inc. (NASDAQ: SWKS) claims about a $3.00 parts cost in both the iPhone 5c and 5s, so Sterne Agee sees a strong tailwind for the stock in 2014, especially in the first half of the year. The stock was trading up 1.6% in Monday’s premarket after closing at $27.68 on Friday, in a 52-week range of $19.57 to $28.61. The consensus FY 2015 EPS estimate is $2.80, and the forward P/E ratio is 9.89. Sterne Agee’s price target on the stock is $31, for an upside potential of about 12%.

RF Micro Devices Inc. (NASDAQ: RFMD) was trading up about 3.4% in Monday’s premarket after closing at $4.95 on Friday, in a 52-week range of $4.27 to $6.20. Sterne Agee’s price target on the stock is $7.00, for an upside potential of about 41%. The consensus EPS estimate for the company’s 2015 fiscal year is $0.58, and the forward multiple is 8.53.

Avago’s forward multiple of less than 14 is the highest in this group, and that seems to indicate that investors are cautious about committing to this notoriously volatile sector. Qualcomm appears to the most fully valued of all the stocks, while RFMD gets the honor for the largest potential upside, and based on the numbers appears to be the one with the most potential for growth in 2014.

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