Qualcomm's Prime Perch

1/14/2013


  Recent Price
$64
  Dividend
$1.00
  Yield
1.6%
  P/E Ratio
17
  Shares (millions)
1,745
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$68.87 - $53.09

Apple ($525; AAPL) and Samsung Electronics ($1,350; SSNLF) have emerged as the clear leaders in the bruising battle for mobile-device dominance. Together they shipped 46% of the world's smartphones in the September quarter and nearly 70% of all tablets.

Then there's Qualcomm ($64; QCOM), which watches as Apple and Samsung struggle for market share but stands to profit regardless of who takes the top spot. Semiconductors and chipsets for Samsung's Galaxy devices generate more than 10% of Qualcomm's annual revenue. Qualcomm draws another 10% from components used in iPhones and iPads. Qualcomm became the third-largest semiconductor supplier in the world in 2012 as measured by revenue, up from ninth in 2010, according to IHS iSuppli.

Qualcomm expects demand for wireless data to rise as emerging markets deploy third-generation networks. And the company is entrenched in the shift to fourth-generation networks, which it projects to handle 560 million connections by 2016, versus today's 40 million. Qualcomm, yielding 1.6%, is a Buy and a Long-Term Buy.

Business breakdown

Qualcomm designs semiconductors, which are manufactured by third-party suppliers, for wireless devices and the infrastructure that supports communication. The company also collects royalties by licensing its technology.

While sales have risen at least 18% year-to-year in the last eight quarters, operating profit margins have contracted over the last year. The lower-margin equipment and services segment (64% of sales in the fiscal year ended September 2012) grew 37% for the year, versus 17% growth from the licensing business (33%). Management expects equipment and services to continue pacing growth.

Net cash exceeds $7 per share, accounting for 11% of the stock's price. Qualcomm says operating cash flow, up at least 20% in each of the past two years, dictates dividend growth. Management has hiked the distribution by at least 11% in each of the past three June quarters.

Qualcomm spent $1.3 billion on stock buybacks in fiscal 2012 and has $2.5 billion remaining on its repurchase plan. Buyback activity has not offset share dilution from employee stock options in the past year. However, the company says it repurchases stock to boost returns, not to lower the share count. Qualcomm paid an average price of $55 per share during fiscal 2012, pausing from January to May and again in September, when shares traded above $60. Qualcomm claims a 12% internal rate of return on share repurchases in the past 10 years.

Conclusion

The stock has rallied 9% since the end of October but still seems reasonably valued at 17 times trailing earnings, 26% below its five-year average and in line with the median technology stock in the S&P 1500 Index. Given its highly visible and predictable revenue stream, Qualcomm warrants a premium to the sector.

Management expects revenue growth of 20% to 26% in fiscal 2013 and double-digit annual growth over the next five years. An annual report for Qualcomm Inc. is available at 5775 Morehouse Drive, San Diego, CA 92121; (858) 587-1121; www.qualcomm.com.

QUALCOMM
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '12
0.89
vs.
0.80
18%
65.45
-
53.09
18 - 15
Jun '12
0.85
vs.
0.76
28%
68.83
-
53.41
20 - 15
Mar '12
1.01
vs.
0.86
43%
68.87
-
54.56
20 - 16
Dec '11
0.97
vs.
0.82
40%
57.97
-
46.40
18 - 14
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
19.12
3.71
0.93
68.87
-
46.40
19 - 13
2011
14.56
3.20
0.81
59.84
-
42.45
19 - 13
2010
10.99
2.46
0.72
49.80
-
31.36
20 - 13
2009
10.42
1.31
0.66
48.72
-
28.16
37 - 21
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
79
49
91
97
95
66

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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