Tech Stocks: Leading the Way Forward

Submitted by Investing Daily as part of our contributors program.

As market tumult spooks investors, it’s more important than ever to stay focused on underlying fundamentals. That’s why I continue to like the technology sector, which remains high in liquidity, low on debt and long on prospects.

Cash reserves are crucial for tech companies, because of their need to invest in the research and development (R&D) that spawns new products and future growth.

According to research firm IC In­sights, spending on R&D by semi­conductor companies worldwide is expected to grow 10 percent in 2012 to a record-high $53.4 billion, com­pared to $48.7 billion in 2011. Mean­while, connectivity requirements and smartphone use continue to burgeon, especially in emerging markets.

A sizable cash hoard also provides a cushion during market downturns. Con­sequently, the right technology stocks offer a combination of growth and safety, for investors anxious about today’s mar­ket conditions but still eager to invest.

That said, tepid economic growth in the US and recessions in the debt-plagued euro zone have buffeted the tech sector this year. Research firm International Data Corp estimates that the worldwide PC market contracted 8.6 percent in the third quarter.

However, tech­nology stocks Cisco Systems (NSDQ: CSCO), Intel (NSDQ: INTC) and Qualcomm (NSDQ: QCOM) all en­joy inherent strengths that help them weather tough times. What’s more, since the decisive conclusion of the contentious US presidential election on Nov. 6, tech stocks have enjoyed a modest rally.

Cisco: Connectivity King

In November, global networking giant Cisco reported first-quarter fis­cal 2013 revenue of $11.9 billion, an increase of nearly 6 percent year over year that trounced consensus expecta­tions of $11.7 billion.

Earnings rose 18 percent to $2.1 billion; earnings per share (EPS) came in at $0.48, a year-over-year increase of 12 percent. The company’s service provider video and wireless segments both saw significant growth of 30 percent and 38 percent, respectively. This latest quarter marks the fourth consecutive positive earnings report for the company.

Cisco is one of the biggest suppliers of Internet-based networking products; the company’s routers and switches are pervasive in offices, classrooms and government offices around the globe.

Cisco will continue to benefit from the accelerating trend of around-the-clock, global connectivity. Analysts’ consensus calls for the company’s earnings to grow 32 percent and rev­enue 5.7 percent in 2013.

So far this year, Cisco has bought back 3.8 billion shares of stock at a cost of $76.4 billion, with $5.6 billion remaining in its current buyback plan. The company raised its dividend after last quarter from $0.08 to $0.14 per quarter, for a current yield of 3.1 per­cent. (See my article Cybercrime: The Cop on the Beat for more on Cisco).

Intel: Resilient R&D

The largest maker of semiconductors in the world, Intel has racked up three-year revenue growth of 12.8 percent, compared to the industry average of 10.8 percent. Nonetheless, economic pressure on Intel’s largest corporate customers dampened the company’s third-quarter 2012 earnings.

In October, the company reported third-quarter revenue of $13.4 billion, a decline of nearly 5 percent from the third quarter a year ago. Earnings came in at $3 billion, down 14.3 percent from the year-ago quarter, for EPS of $0.58 compared to $0.65 a year earlier.

Shares of Intel are down 17 percent year-to-date, and have dropped almost 25 percent over the past five years. However, we think this company still faces excellent long-term prospects.

Intel’s PC business remains its biggest operating unit, accounting for two-thirds of sales in 2011. Intel is likely to continue its dominance of the PC microprocessor market over the long haul, thanks to a robust R&D budget of more than $8.4 billion in 2012. Intel’s 27 percent increase in R&D expendi­tures this year was the largest among companies spending $1 billion or more on R&D.

Meanwhile, the company is on track to generate $11 billion in free cash flow in 2012—that’s quite a “war chest” for dividend boosts and stock buybacks. While you wait for PC demand to re­bound, the stock will reward you with a healthy dividend yield of 5.6 percent.

Qualcomm: License Lock

In November, Qualcomm’s man­agement announced that it expects a compound annual growth rate over the next five years of at least 10 per­cent for both revenue and EPS. The same month, Qualcomm reported a 20 percent surge in earnings for its fourth quarter of fiscal 2012, driven by strong sales of chipsets used in wireless devices and increased revenue from licensing.

Qualcomm reported earnings of $1.27 billion, or $0.73 in EPS, com­pared to earnings of $1.06 billion, or $0.62 in EPS, for the same year-ago pe­riod. Revenue rose 18 percent to $4.87 billion. Analysts were expecting EPS of $0.82 on revenue of $4.7 billion.

For the full fiscal year, revenue was $19.1 billion, up 28 percent year over year and earnings were $6.1 billion, up 43 percent. EPS was $3.51, up 39 percent.

Qualcomm is comprised of two seg­ments: Qualcomm CDMA Technolo­gies (QCT) and Qualcomm Technolo­gy Licensing (QTL). QCT designs and sells chipsets that are vital to a variety of best-selling electronic devices; the QTL division owns a portfolio of patents for mobile telecommunications.

QTL’s grip on this proprietary tech­nology means that every time a manu­facturer sells a handset that facilitates high-speed data connections, Qualcomm garners a royalty on the sale. Analysts estimate that by 2015, one billion smartphones will be in use around the world, up from last year’s 472 million.

The stock’s price-to-earnings ratio (P/E) of about 17 is a discount com­pared to an average P/E of about 20 for the Communications Equipment industry and a discount compared to the S&P 500 average P/E of 15.7. (See my article The Key to Reliable Tech Growth for more on Qualcomm).