The 'internet of things' phenomenon - reflecting our insatiable need to connect our homes, cars, workplaces and even accessories to the internet - marks the next growth frontier for technology hardware and equipment companies. Moreover, the worldwide proliferation of smartphones and tablets continues to fuel demand for the microchips that power them. Those trends underpinned the sector's strong performance in 2014.
Exploiting these growth opportunities has required strategic thinking. The best example may be CSR (CSR), which posted double-digit sales declines across its divisions in the first half of 2014. That reflected fierce Chinese competition and weak demand in its digital cameras and gaming segments. Yet the audio and wireless connectivity specialist rallied in the third quarter, growing operating profit by a fifth and widening its gross margin to a record 60 per cent. Its turnaround partly reflects its shift from selling handset components to integrating audio, connectivity, processing and applications on to a single, higher-margin chip. It has also launched 'connected home' products such as VibeHub, a multi-user audio platform, and earns 28 per cent of its revenue from selling Bluetooth, GPS and other connective technology to the automotive market.
Investors are set to lose CSR to Qualcomm this summer, however, after shareholders voted in favour of the chipmaker's takeover. Yet, at 858p, CSR's shares still trade below Qualcomm's 900p-a-share offer, suggesting scope for some short-term upside.
Laird (LRD), meanwhile, is not only making the right products but expanding into the right places. The wireless connectivity and electronics-casing specialist has bolstered its operations in Shanghai and South Korea, built a factory in Vietnam,and plans to open another 'telematics' (in-car technology) plant in Brazil this spring. It's also benefiting from the rollout of Apple's iPhone 6, increasing investment in high-speed networks and the US auto market recovery. Indeed, it supplies Ford, GM and Chrysler, and has started selling higher-margin antennae that enable location tracking and wireless internet in vehicles.
The upshot is that Laird's organic dollar revenues rose 11 per cent in the nine months to end-September 2014. Yet, despite the group's rich prospects, at 305p its shares trade at an attractive 14 times broker Liberum's forecast earnings for 2015, and promise a healthy 2015 prospective yield of 4.2 per cent. They're well up on our buy tip (209p, 8 Aug 2013), but look likely to climb higher.
A flood of new devices, as well as surging demand for connected homes, businesses, cars and wearable devices, should give technology hardware companies plenty to play for in 2015. Investors should also have manifold opportunities to profit despite the sector being so small.
| Company | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance(%) | Last IC view |
| Arm Holdings | 1,059 | 14,872 | 49.5 | 0.6 | 6.9 | Hold, 874p, 22 Jul 2014 |
| CSR | 858 | 1,425 | NA | 1.0 | 21.9 | Buy, 569p, 25 Jul 2014 |
| Laird | 319 | 854 | 16.5 | 3.8 | 4.0 | Buy, 309p, 09 Jan 2015 |
| Pace | 340 | 1,071 | 12.1 | 1.0 | -3.3 | Buy, 338p, 09 Jan 2015 |
Favourites
Pace (PIC), our value tip of the year (338p, 8 Jan 2015), is a global supplier of set-top boxes to the mushrooming pay-TV industry. Consolidation among its key cable-TV customers and the threat of internet-connected devices have spooked investors. But Pace's new products, cost-cutting acumen and strong cash generation give us confidence. Look no further than recently acquired Aurora: that integrates video, data and voice applications into cable operators' networks and is forecast to deliver double-digit sales and profit growth this year. Moreover, at 348p, Pace's shares trade at a measly nine times broker Numis's full-year forecast earnings estimate of 56.3¢.
Outsiders
Arm's (ARM) sales, profits and shipment volumes are growing strongly, and it offers exposure to several attractive markets. But shares in the group - which licenses its microchip designs to companies including Apple and Samsung then collects a royalty for every chip subsequently shipped - trade on an extortionate 33 times Liberum's forecast earnings for 2015. Moreover, its royalties - which account for 46 per cent of total revenues - grew just 4 per cent in the first nine months of 2014, while royalty per chip shrunk 8 per cent to 4.5¢. That underscores our view that the princely share rating is unsustainable.
