The big cell-phone makers get more media coverage than Tiger Woods' extracurricular activities. Apple , Research in Motion , Palm and Motorola have cool new phones that are flying off the shelves. But the companies' shares may not be the best way to profit from high-tech devices.
It's easy to forget that the name stamped on the front of a gadget didn't make everything buried beneath the shiny touchscreen. The guts of most phones are an amalgam of chips and circuit boards from smaller companies around the world that are better suited to produce the nuts and bolts of technology than the finished product. Companies like Marvell Technologies , a supplier of connectivity chips for Research in Motion, and Texas Instruments , which makes the Palm Pre's processor, are examples of the auxiliary beneficiaries of the smart-phone boom.
While they may not enjoy the same sort of margins or name recognition that the designers of the phones do, they bolster revenue by landing major smart-phone-chip deals. The effect of smart-phone sales on those companies is difficult to determine due to the hush-hush nature of the orders demanded by cell-phone companies. Many times, suppliers are identified only when a phone is torn apart by research companies.
Other chip makers, like Qualcomm and Samsung, which is the envy of many since it supplies Apple with chips for the iPhone, are attractive derivative bets on the smart-phone market, but a broader type of technology probably offers greater opportunities for growth due to its universal applications.
Printed circuit-board makers like Jabil Circuit and Multi-Fineline Electronix create components for phones, but their products are so generic, they can be used in literally anything that's electronic. That offers diversification benefits.
Jabil and Multi-Fineline look more attractive based on valuations and performance over the past year. Both companies have price-to-earnings-to-growth ratios (PEG) of less than 1, indicating they're undervalued based on projected growth, and price-to-earnings ratios of about 13. Chipmakers such as Marvell, Qualcomm and Texas Instruments have PEG ratios consistently above 1 with P/E ratios of 20-plus.
Out of cell-phone "gut" makers, the best bet is probably St. Petersburg, Fla.-based Jabil, headed by chief executive officer Timothy Main. With the support of an impressive lineup of customers, Jabil stands to see a spike in revenue once the economy gets back on its feet. Deals struck with IBM , Hewlett-Packard , Cisco and Research in Motion have given Jabil entry into some of the world's most profitable companies.
Multi-Fineline has room for growth, but Jabil is more established and has the connections to enjoy a fruitful recovery. Jabil runs production plants in 22 countries and employs about 85,000 people around the world.
Marvell's stock has posted fantastic gains over the past year, more than tripling, as the company beat analysts' earnings expectations. Texas Instruments and Qualcomm have increased 89 per cent and 55 per cent, respectively. Meanwhile, Jabil and Multi-Fineline have more than doubled.
Smart phones will make more than just Steve Jobs rich. The other, less sexy benefactors can help investors play multiple sides of the cell-phone trend. Consider printed circuit boards as one of the strongest disregarded supporting cast members.