Apple’s Surprise Q3 Earnings Could Be Huge for These 6 Stocks

May 3, 2018 by 247lee

Just when you think they have finally tightened the noose around Apple Inc. (NASDAQ: AAPL), the company comes out and not only beats analysts expectations on the bottom line, but they present iPhone sales for the quarter that match expectations and also announced a massive stock buyback program that Wall Street is very enthusiastic about. While the second-quarter expectations are against a reasonably low bar, the positives in the report cannot be ignored.

A new Deutsche Bank research report examines the suppliers to Apple that may benefit from the company’s positive showing. While the percentage of business that companies have with Apple tends to shift, there is no denying that significant sales to the technology behemoth are a positive.

The Deutsche Bank team focused on six companies in the report, and also tempered their results and research with this:

Apple reported results that we believe should be viewed as a positive for the semiconductor supply chain under our coverage. We think that the key risk to the supply chain could come from their inventory figure, which came in at $7.77 billion (+73% quarter over quarter highest figure ever by ~$3 billion). We believe we’ve captured Apples unit weakness going forward in our estimates, with the caveat that 1) should the weakness be prolonged across multiple quarters, this could impact our estimates as some models assume a modest rebound and 2) the magnitude of declines could be greater than expected, thus rebounds could come off a lower base.

Here are the six companies that are affected by Apple purchasing.

Broadcom

This stock has been on fire over the past year and remains a top pick at Deutsche Bank and across Wall Street. Broadcom Ltd. (NASDAQ: AVGO) has an extensive semiconductor product portfolio that addresses applications within the wired infrastructure, wireless communications, enterprise storage and industrial end markets.

Applications for Broadcom’s products in its end markets include data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems and displays.

The company does a large part of its business with Apple, in excess of 20% in fiscal 2017, and the analysts noted this in the report:

We expect Broadcom’s Apple exposure to be more driven by Apple units rather than content expansion over the next 12 months. We also expect 802.11ax could potentially be a dollar content driver in late-2018 or 2019. We forecast the company’s Wireless Communications segment growing +15% y/y to $6.23b in FY18E, representing 30% of sales.

Broadcom shareholders are paid a solid 3.06% dividend. Deutsche Bank rates the stock at Buy and has a $310 price target on the shares. The Wall Street consensus target was last seen at $321.50. The shares traded early Thursday at $225.85 apiece.

Qualcomm

This one may be offering aggressive accounts the best entry point in years. Qualcomm Inc. (NASDAQ: QCOM) designs, develops and supplies semiconductors and collects royalties on wireless handheld devices and infrastructure based on its dominant position in CDMA and other related technology patents.

In addition, Qualcomm provides systems software and components to wireless handset vendors and promotes applications and services that run on high-speed wireless networks. The company operates primarily through two segments: CDMA Technologies and Technology Licensing.

The company ended up finishing the fiscal second quarter with a positive earnings surprise, reporting earnings of $0.80 per share, compared to the $0.70 per share expected by analysts. The company generated $5.23 billion in revenue, compared to $5.19 billion expected by Wall Street.

The company got approximately 18% of its fiscal 2017 revenue from Apple, and the analysts said this in the report:

We expect Qualcomm’s revenue exposure to decline in next-gen handsets due to a potential allocation shift toward Intel. Prior to 2016, The company held 100% market share of discrete baseband processors at Apple. In 2016, Intel made significant inroads to drive Qualcomm’s unit market share closer to 60%, in our estimation. We believe that 2017 iPhones likely saw them claiming a 40% allocation and Intel a 60% allocation. More meaningful going forward, however, continues to be the royalty dynamic between Apple and Qualcomm, which generates both a greater amount of revenue/profit.

Qualcomm investors are paid a large 4.9% dividend. Deutsche Bank’s Hold rating comes with a $55 price target, which compares with the posted consensus target of $66.59. The shares traded at $49.85 Thursday morning.

Analog Devices

This stock could very well benefit from an increase in information technology (IT) spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits (ICs) for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Last year the company introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

Analog Devices got approximately 14% of company revenues from Apple in 2017. The analyst noted this in the report:

Apple was a 14% customer in and a 13% customer in fiscal 2016, though we expect this to decline to the high-single digits range going forward. The company mainly supplies the 3D touch modules in iPhones. We presently model Apple an ~8% customer in fiscal 2018 estimated despite our expectation for lower content in the iPhone X. The 3D touch module historically designed by Analog Devices since 2015 is not in the iPhone X.

Analog Devices investors are paid a 2.17% dividend. The $87 Deutsche Bank price target, as well as a Hold rating, compares with the $103.14 consensus price target. The stock traded recently at $87.05 a share.

Texas Instruments

This is old-school chip tech company has backed down from highs posted in January and is also offering a great entry point. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components to digital light-processing technology and calculators.

Some 65% of Texas Instruments sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets. The company did approximately 9% of fiscal 2017 revenues with Apple, and the analysts said this in the report:

The company’s exposure to Apple has historically been described as across hundreds of parts and evenly spread out between their devices (we note that Apple’s revenue mix is ~60% iPhone, ~10% each for Mac, iPad, Services, ~5% other). Thus, we think that Texas Instruments exposure to iPhones in particular could be ~5% of total sales. In 2016 and 2017, Apple was not disclosed as a 10% customer, while the company was a 11% customer for TI in 2015.

Shareholders of Texas Instruments are paid a 2.41% dividend. Here too, the Deutsche Bank rating is Hold, and it comes with a price objective of $107. The consensus price target for the shares is $119.16, and the shares were last seen trading at $101.35 apiece.

Intel

This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending and away from PCs. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.

The company’s platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

The company’s share of total business with Apple is expected to be an estimated 5% of revenue for calendar 2018. That figure may be growing, and the analysts said this:

We estimate that Apple was <3% of sales for Intel ex-CPU revs in 2016, with an estimated ~40% allocation for baseband processors. We believe this allocation likely expanded to ~60% in the latest generation iPhones and note that recent press reports have this figure as high as 70% in 2018 and 100% in 2019.

Intel investors receive a solid 2.29% dividend. Deutsche Bank’s Buy rating comes with a with a price target of $64. The consensus price objective is just $54.22, and the stock was trading at $52.00 a share.

ON Semiconductor

Aggressive accounts may want to look at this smaller cap play. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic ICs and discrete chips into the automotive, communications, computing, consumer, industrial and medical applications. The company is in the midst of a transformation from a seller of commodity discrete chips into higher value-added analog ICs, both through organic growth and acquisitions.

The analysts view ON as an underappreciated way for investors to benefit from the emergence of advanced driver assistance systems and eventually autonomous driving. While the company is inherently levered (operationally and financially) and therefore subject to investor fears of cyclical volatility, many continue to see structural upside for the shares.

The company has lower exposure to Apple, but the Deutsche Bank team noted this:

ON has not historically had a meaningful exposure to Apple; however, we believe that their content is likely rising in next-gen devices. Specifically, we see them gaining content in Applesfast charging solution (charger side vs. device side). We estimate that this could mean that AAPL is ~5% of ON sales in 2018 estimated.

The Deutsche Bank price target for the Buy-rated stock is $27 a share. The posted consensus target price is $26.21, and the shares were trading at $21.85.

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These six top companies to varying degrees are exposed to the fortunes at Apple. While the numbers are always subject to change, it’s a good bet that Apple continues to strive for innovation and improved product performance.