3 Reasons Why This Apple Supplier Remains a Solid Buy

Chipmaker TriQuint Semiconductor (NASDAQ: TQNT  ) can be likened to Rocky Balboa -- beaten and battered in the early rounds, but rallying for a comeback toward the end. After a terrible start to fiscal 2013, TriQuint quickly regrouped and finished the year in the black, as management lived up to its promise of posting a profit -- with some help from smartphone majors Apple (NASDAQ: AAPL  ) and Samsung and the rapid growth of connected devices.

It looks like a repeat performance is in the cards for fiscal 2014. When TriQuint recently issued guidance for the current quarter, it called for a loss between $0.11 and $0.13 per share on revenue of $170 million-$180 million. This was way below consensus estimates -- analysts were looking for net income of $0.04 per share on revenue of $223.61 million.

However, TriQuint shares didn't tank on this news; instead, they gained more than 5%. That's because TriQuint management believes that the company will meet or beat Wall Street estimates of $0.49 per share this fiscal year, and this claim looks credible, since the company delivered what it had promised last year. Moreover, TriQuint has enough tailwinds to help it achieve its target. Let's take a look.

Getting stronger at Apple
TriQuint's business from Apple contractor Foxconn is growing at a healthy rate. In the recently concluded quarter, TriQuint generated 44% of its revenue from Foxconn, up from 35% in the preceding quarter. What's more, it looks like the chipmaker is selling higher-margin content to its chief customer, as gross margin improved 550 basis points in the previous quarter from the year-ago period.

But as sales of the latest iDevices slow down, TriQuint's business will no doubt be hurt. Management said that they are "anticipating lower demand from a large mobile customer." However, this is expected to be a short-term phenomenon, and TriQuint expects to hit the ground running from the second quarter onward. Also, considering the massive year-over-year improvement in earnings that TriQuint expects this year -- from $0.09 per share to $0.49 per share -- it seems that it is counting big on Apple's upcoming products.

According to 9to5mac, Apple is reportedly planning to build sapphire-crystal displays for iPhones going forward, as it moves toward a 5-inch screen size. There are also reports that put the next iPhone's release in June of this year, with the probable screen size ranging from 4.7 inches to 5.5 inches. A bigger iPhone could endear Apple to a wider customer base that loves bigger screen sizes.

More importantly, a bigger iPhone might bolster Apple's position in the Chinese market. Bloomberg reports that big-screen devices are a major factor for customers looking to purchase a smartphone in China, which is why the next logical step for Apple would be to introduce a bigger device after its China Mobile (NYSE: CHL  ) deal. The combination of a bigger device along with China Mobile's 760 million customers is potentially heady for Apple -- and TriQuint, as well.

Beyond Apple
There's no doubt that Apple is very important to TriQuint, but there are other important catalysts at play for the company. Among the most important is China Mobile's TD-LTE rollout. TriQuint is a supplier to China Mobile's equipment suppliers -- Huawei and ZTE -- that are helping it in the deployment of the network. 

The company sees strong demand for base-station and optical products in China as carriers roll out LTE. By the end of the year, TriQuint estimates that Chinese telcos will build more than 400,000 4G base stations. But things could get even better, as China Mobile is planning to build 500,000 base stations in total this year, with the likes of China Unicom further adding to the LTE opportunity going forward.

Margin-boosting initiatives
Apart from these business opportunities, TriQuint is also focusing on cost-reduction initiatives to boost the bottom line. It is upgrading its wafer capacity to improve throughput and reduce costs, while strong demand for its high-margin products is expected to aid its earnings growth. Last fiscal year, sales of TriQuint's high-volume products grew 36%, and this trend is expected to continue this year. 

As such, TriQuint is expecting a 500-basis-point improvement in gross margin in fiscal 2014, double of what it saw last year. 

The bottom line
TriQuint is not just looking to increase revenue, it is intent on growing profitably. The prospects in its end markets are looking favorable, while a forward P/E of less than 13 suggests that TriQuint is a bargain at current levels. As such, even though TriQuint is hovering close to its 52-week highs, it remains a solid buy.

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