Qualcomm ($41; NASDAQ: QCOM), a maker of wireless equipment, has delivered double-digit growth in sales and per-share operating profits in each of the last eight quarters. Over the last four quarters, Qualcomm generated $2.42 billion in free cash flow, up nearly 24% from year-earlier levels.
The company is well-positioned to capitalize on wireless carriers’ move toward third-generation systems, with a variety of new microchips for notebook computers and mobile computing devices slated for release over the next year. Qualcomm has grown its market share substantially over the last two years, and strong orders for recently launched products suggest more share growth is in store.
At 19 times projected year-ahead earnings, Qualcomm trades below its five-year average forward P/E ratio of 24. Qualcomm, slated to declare March-quarter earnings on April 23, is being upgraded to a Buy and a Long-Term Buy. Litigation concerns could trigger near-term volatility, but 12-month and 36-month prospects are bright.
Three stocks to avoid
The Forecasts does not assign an Underperform rating lightly.
We consider an Underperform rating a strong stance against a stock and limit it to companies we believe are capable of lagging even during periods when the rising tide is lifting most boats. We do not advise that subscribers sell Underperforms short. We would, however, suggest that you sell the stocks if you own them.
The three stocks below are all being downgraded to Underperform from Neutral this week.
General Motors ($19; NYSE: GM) earns a Quadrix® Overall score of 1, with no real areas of strength as it continues to lose both money and market share. In the March quarter, the company sold 11% fewer cars than it did in the year-earlier period. With consumer confidence at 17-year lows, prospects for new-car sales over the next year look bleak. GM also faces other pressures, including the need for up to $5 billion in cash to assist parts maker Delphi, and a strike at a maker of auto parts that could disrupt production if its drags on.
Hurt by poor operating results, falling earnings estimates, and a 69% stock-price decline over the last year, Sprint Nextel ($6; NYSE: S) earns a Quadrix Overall score of 4. Consensus estimates project per-share-profit declines of 86% this year and 17% next year. Despite trading near a 20-year low, Sprint shares are not cheap at 63 times the 2009 consensus profit estimate.
Even after two dividend cuts and the issuance of 176 million shares of common stock (20% of shares outstanding), Washington Mutual ($11; NYSE: WM) may still need additional liquidity. Revenue and per-share profits declined in each of the last two quarters, and consensus estimates project more declines. WaMu has already disclosed $3 billion in losses on mortgage loans, but at least one estimate projects another $20 billion in losses to come.
Consumer confidence dropped in March to the lowest level since 1982, as rising food and energy prices and declining home prices have Americans pessimistic about the country’s economic outlook.
If consumer confidence does not recover soon, retailers and other consumer-dependent stocks could suffer. But the discount giant Wal-Mart Stores ($56; NYSE: WMT) delivered decent sales growth in March, while most department stores and specialty retailers saw sales fall. Against the current economic backdrop, the defensive characteristics of Wal-Mart and drugstore chain Walgreen ($36; NYSE: WAG) have appeal. Wal-Mart and Walgreen are Long-Term Buys.
General Electric ($32; NYSE: GE) reported an 8% decline to $0.44 per share, $0.07 below the consensus estimate despite 8% revenue growth. Four of GE’s six segments saw profits fall, with nearly 20% declines at both financial divisions. The breadth of the problems surprised many investors, as demand for infrastructure items outside the U.S. and modest gains at NBC were the only bright spots. Problems in the credit markets hurt financial operations, while weakened consumer and housing-related spending stunted appliance sales. GE lowered its 2008 per-share-earnings target and now expects 0% to 5% growth. GE is rated Neutral . . . Johnson & Johnson ($66; NYSE: JNJ) reported per-share earnings of $1.26, $0.06 above the consensus estimate and up 9% excluding charges in 2007. Consensus estimates project per-share-profit growth of 7% this year and 6% next year, targets J&J should be able to beat. J&J is a Buy and a Long-Term Buy . . . IBM ($117; NYSE: IBM) reported per-share earnings up 36% to $1.65, $0.20 above consensus estimates. Revenue rose 11% to $24.5 billion, paced by double-digit gains in services and software. IBM is a Buy and a Long-Term Buy . . . St. Jude Medical ($44; NYSE: STJ) earned $0.53 per share, up 30%. Sales rose 14% to $1.01 billion. The company raised its 2008 per-share-profit target to $2.15 to $2.20, above the $2.13 consensus. St. Jude is a Long-Term Buy . . . Intel ($22; NASDAQ: INTC) reported March-quarter profits of $0.25 per share, down 11% and in line with consensus estimates. Sales rose 9%. The shares rose on the news, most likely because the company’s projected June-quarter sales and gross profit margins are a bit above the consensus. Intel is rated Neutral.
Wells Fargo ($28; NYSE: WFC) earned $0.60 per share in the March quarter, down 9% but $0.03 higher than the consensus estimate. The company set aside $2 billion to cover credit losses, and charge-offs rose to 1.6% of total loans, up from 0.9% in the year-earlier period. Revenue rose 12% to $10.56 billion, as mortgage applications rose 17% and core deposits increased 9%. A Long-Term Buy, Wells Fargo remains our only pick in the banking sector and has a AAA credit rating . . . Bear Stearns ($10; NYSE: BSC), the troubled investment bank slated to be bought by J.P. Morgan Chase ($44; NYSE: JPM), received notice from the Securities and Exchange Commission that it may face civil lawsuits for anti-competitive bidding for municipal bonds. In other news, Morgan announced earnings of $0.68 per share in the March quarter, down 49% and $0.04 above the consensus estimate. The financial-services giant wrote off $2.6 billion in loans. J.P. Morgan is rated Neutral . . . Wachovia ($25; NYSE: WB) announced it would decrease its dividend 41% and issue new stock in order to maintain capital reserves. For the March quarter, the company lost $0.14 per share excluding one-time items and wrote off $1.56 billion in debt. Wachovia is rated Neutral . . . Citigroup ($23; NYSE: C), which raised more than $30 billion of capital from November through January, is reportedly close to selling $12 billion in leveraged loans and bonds to private-equity firms. Citigroup is a Neutral.
The Pentagon approved the purchase of six new F-35 fighter jets from Lockheed Martin ($103; NYSE: LMT) and announced plans to purchase another six for a total of roughly $2.4 billion. Lockheed is a Focus List Buy.
AstraZeneca ($42; NYSE: AZN) shares rose 5% on news that the company resolved a patent dispute that allows it to sell $5 billion ulcer drug Nexium through May 2014 without generic competition. AstraZeneca is a Long-Term Buy.
Merck ($41; NYSE: MRK) is fending off accusations that the company ghostwrote dozens of articles about its withdrawn drug Vioxx for publication in scientific journals. Merck is rated Neutral.