Qualcomm Shares Dialed Up To Rally

10/28/2013


  Recent Price
$69
  Dividend
$1.40
  Yield
2.0%
  P/E Ratio
16
  Shares (millions)
1,765
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$70.37 - $59.02

Qualcomm ($69; QCOM) earns Quadrix scores above 75 for both Momentum and Value, a trait shared by less than 5% of S&P 1500 members. The stock, yielding 2.0% and trading at 14 times expected year-ahead earnings, is a Focus List Buy and a Long-Term Buy.

The last time Qualcomm grew sales less than 18% was the September 2010 quarter. Cash from operations, up 20% in the past year, has risen in eight of the past 10 quarters. But gross profit margins slipped to 65% in the June quarter, their lowest level for any quarter in more than 11 years.

The margin erosion spooked some investors. The growth trajectory of mobile devices is projected to slow in the next few years, especially for the high-end gadgets that use Qualcomm's priciest components, which have supported profit margins.

Industry watchers agree that low-end devices will likely outgrow premium models in coming years. Yet the success of Apple's ($520; AAPL) iPhone 5S relative to the less-expensive 5C suggests that, for now, plenty of consumers will pay up for high-end devices.

With an eye toward the future, the company has refocused on its core business of supplying components that power portable devices. In the past three months, Qualcomm agreed to sell its logistics and transportation business for $800 million and cashed out of its stake in an Indian wireless-internet venture.

Meanwhile, the company unveiled a smartwatch featuring its Mirasol display, a reflective technology that can illuminate a color screen in direct sunlight while consuming very little power. Qualcomm plans to produce the watch in limited supplies. Ultimately, Qualcomm's watch targets not consumers, but device makers the company hopes to inspire to make their own wearable gadgets with Mirasol displays.

A Florida court found Qualcomm guilty of infringing on wireless patents held by ParkerVision ($7; PRKR). ParkerVision originally sought nearly $500 million in damages, though the award could potentially top $2 billion if a jury decides in the second phase of the trial that the infringement was intentional. However, the lawsuit will probably have minimal effect on Qualcomm's results beyond a charge excluded from earnings. Qualcomm generated $4.73 billion of free cash flow in the 12 months ended June and holds $11.44 billion ($6.48 per share) of net cash on its balance sheet.

At less than 16 times trailing earnings, shares trade 28% below their five-year average of 22. The stock also trades at a discount to five-year norms for price/cash flow, enterprise ratio, and price/book. If the P/E ratio returns to its one-year average of 18 and Qualcomm meets the consensus profit estimate of $4.95 per share for fiscal 2014, the shares will rally 31% to $90 over the next year. Even using the lowest analyst profit estimate of $4.25 per share, Qualcomm has an implied price of $77 based on a P/E of 18.

Set to post September-quarter results Nov. 6, Qualcomm is projected to earn $1.08 per share, implying 21% growth on a revenue gain of 30%. 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
Jun '13
1.03
vs.
0.85
35%
67.65
-
59.46
16 - 14
Mar '13
1.17
vs.
1.01
24%
68.50
-
62.33
17 - 16
Dec '12
1.26
vs.
0.97
29%
64.72
-
57.29
17 - 15
Sep '12
0.89
vs.
0.80
18%
65.45
-
53.09
18 - 15
           
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
-
31.63
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
97
96
76
96
90
50
43

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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