Qualcomm Incorporated 2.doc

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Qualcomm Incorporated 2.doc

  1. 1. Qualcomm Inc. (QCOM) Sean Fallows Date: October 5, 2005 Consensus Estimate 6/05A 9/05E 9/06E Sector: Technology EPS $1.18 $1.17 $1.44 Industry: Communications P/E 38.09 38.59 31.36 Equipment Current Price: $45.16 Long Term Growth Rate: 18.98% 52 Wk Price Range: $32.08-$46.28 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 14,963,907 P/E (TTM) 38.09 27.20 29.61 20.80 Beta: 1.29 P/S (TTM) 14.51 6.05 5.17 2.91 Market Cap ($million): 72,961.16 P/B (MRQ) 6.97 4.72 5.64 3.93 Shares Out (million): 1,630.42 ROA (TTM) 17.79 8.72 11.11 7.64 Inst. Hold %: 68.50% EBO Valuation $9.48 Div Yld: .36 Recommendation: BUY Total Debt/Equity: 0.00 Stop-loss Price: $41.00 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price $50.00 40% 49% Investment Thesis Summary Fundamental Valuation: • The growing global demand for Negative: Based on a discount rate of 7.81%, Qualcomm’s Code Division Multiple Qualcomm’s EBO valuation is $9.48, which is Access (CDMA) integrated chipsets are only 4.75% of its current price. expected to sell 40 million units this fourth quarter, up from the previously projected Relative Valuation: 38 million units. Negative: Based on the comparison to its • Qualcomm’s licensing business from competition, Qualcomm is richly overvalued and CDMA technology is expected to grow at expensive. 18-20% from revenues received from manufactures that use CDMA chipsets. Technical Analysis: Positive: All technical indicators suggest that • The pricing power through Qualcomm’s Qualcomm’s stock price is on an upward trend. CDMA patents creates a competitive advantage over the competition in the Earnings Analysis: industry. Positive: A strong earnings surprise in the last • Qualcomm should expect to increase quarter along with 29 upward earnings revisions earnings and revenues as wireless in the last month suggests a strong outlook for technology will continue to be the leader future earnings. for future handset devices. • With no long term debt and 8 billion Analyst Recommendations: dollars in cash, Qualcomm has an added Positive: Mean recommendation from analysts is opportunity for advanced research and a “Buy/Outperform.” There has also been a development as well as other investments. constant amount of upgrades from “Hold” to • Developing countries such as India and “Buy” in the past year. South Korea may not be able to keep up with the high replacement rate for Institutional Ownership: advanced CDMA handsets. Positive: The number of institutional investors • Qualcomm has a potential risk concerning has increased in the past three months while the lower expected earnings due to stock amounts of shares have also increased by 2.4%. option compensations. 1
  2. 2. Company Summary Qualcomm was started in 1985 by seven individuals who first had an incentive to produce a satellite-based data messaging system that would be used by the trucking industry to help manage fleets. The OmniTRACS system was released to the trucking industry in 1988 and is now the largest commercial satellite-based mobile system for the industry.¹ The second movement into the technology market was the development of Code Division Multiple Access (CDMA) in 1989. The CDMA technology was used for wireless and data products and was later proven effective after a series of demonstrations throughout the world. This allowed Qualcomm to sign agreements with manufacturers and service providers for the use of the CDMA technology.¹ In 1995, the CDMA chipsets were commercial introduced and became one of the fastest growing wireless technologies in the world. In 1999, the CDMA became the leading technology for third-generation (3G) wireless systems, which provides higher traffic speeds and greater capacity for transferring data. Qualcomm has licensed its CDMA patent to over 125 telecommunications equipment manufactures worldwide and continues to be the leader in CDMA development.¹ Besides Qualcomm’s leading CDMA (QCT) division, they also operate in two other divisions, technology licensing (QTL), and wireless and internet (QWI). The QCT division provides integrated circuits and system software to wireless handset manufactures across the world. With CDMA technology leading the way, Qualcomm has also developed an addition to the CDMA, which is called WCDMA. The WCDMA technology uses Qualcomm’s Mobile Station Modem (MSM™) chipsets which support mobile broadband services including high-resolution interactive gaming, multimedia music, DVD-quality video, and access to large email attachments. All of these high quality data files can be sent at speeds threes times faster than today’s commercial networks and compare to the speeds of DSL. The QTL division accounts for a third of Qualcomm’s sales from a number of patents related to CDMA technology. Qualcomm receives royalties from manufactures that earn revenues from the sale of CDMA based equipment. The QWI division of Qualcomm provides satellite-based data communication for the trucking and transportation industry. This is useful to the industry because it allows quick access to equipment and vehicle positioning through the OmniTRACS system.¹ Division % of total sales in 3rd quarter FY 05’ QCT 56% QTL 33% QWI 11% Total Sales 100% *divisional sales from harrisdirect.com 2
  3. 3. Competition and Strategy Qualcomm is in an industry that is very competitive due to the rapid pace of technology development and innovation. With companies such as Motorola, Erickson, Texas Instruments, and Broadcom as their closest competition, Qualcomm has found a competitive advantage through their licensing and patents on their CDMA chipsets. Qualcomm generates pricing power through the sales of CDMA technology and receives revenues for every handset sold that uses these innovative chipsets. Qualcomm’s new development of third generation (3G) WCDMA chipsets is sure to be a leader in future wireless handset technology as the computer, cell phone, personal organizer, gaming system, camera, and other equipment will eventually all be consolidated into one small device using wireless capabilities. Recently in mid-August this year, Qualcomm announced that it would purchase privately held Flarion Technologies for 600 million dollars and stock, which would expand the company’s wireless technology market. “Flarion’s technology, called orthogonal frequency division multiplex access, or OFDMA, will, according to Qualcomm, will complement its own code division multiple access, or CDMA technology, a standard used for cellphones.”³ This will help Qualcomm expand its development with the CDMA and OFDMA and further advance the technology industry. Qualcomm’s focus as a company is to develop the latest technology at a rapid pace while ultimately lowering licensing and carrier costs. The company’s mission is to “ensure successful CDMA and WCDMA rollouts by eliminating delays due to lack of software tools, hardware tools, and other necessary products”. ¹ ¹Information from Qualcomm.com ²Information from Harrisdirect.com ³Information from mobilemonday.net 3
  4. 4. Historical Revenue and Earnings: Historical Revenue Historical Earnings FY 9/05 FY 09/04 FY 09/03 FY 09/05 FY 09/04 FY 09/03 1st Quarter 1,350 1,207 1,068 .301 .248 .169 2nd Quarter 1,365 1,216 1,017 .312 .264 .157 3rd Quarter 1,358 1,341 892 .333 .289 .148 4th Quarter NA 1,117 870 NA .229 .154 Total 4,113 4,881 3,847 .946 1.03 .629 Qualcomm has seen a steady increase in revenues and earnings over the past three fiscal years. These earnings increases can be attributed to a growing global demand for CDMA integrated chipsets and gains from licensing royalties. 4
  5. 5. I. Fundamental Valuation Qualcomm PARAMETERS FY1 FY2 Ltg as of 9/29/05 EPS Forecasts 1.17 1.44 18.98% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 5.91 and a 7-year growth period. Discount Rate 7.81% Dividend Payout Ratio 24.67% Next Fsc Year end 2005 Current Fsc Mth (1 to 12) 12 Target ROE (industry avg.) 3.40% Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Long-term EPS Growth Rate (Ltg) 0.1898 0.1898 0.1898 0.1898 0.1898 Forecasted EPS 1.17 1.44 1.71 2.04 2.43 2.89 3.43 Beg. of year BV/Shr 5.910 6.791 7.876 9.167 10.702 12.529 14.703 Implied ROE 0.212 0.218 0.222 0.227 0.230 0.234 ROE (Beg. ROE, from EPS forecasts) 0.198 0.212 0.218 0.222 0.227 0.230 0.234 0.194 0.154 0.114 0.074 0.034 Abnormal ROE (ROE-r) 0.120 0.134 0.139 0.144 0.149 0.152 0.155 0.116 0.076 0.036 -0.004 -0.044 growth rate for B (1-k)*(ROEt-1) 0.000 0.149 0.160 0.164 0.168 0.171 0.173 0.176 0.146 0.116 0.086 0.056 Compounded growth 1.000 1.149 1.333 1.551 1.811 2.120 2.488 2.925 3.352 3.740 4.061 4.287 growth*AROE 0.120 0.154 0.186 0.224 0.269 0.323 0.387 0.338 0.253 0.134 -0.017 -0.189 required rate (r) 0.078 0.078 0.078 0.078 0.078 0.078 0.078 0.078 0.078 0.078 0.078 0.078 0.078 discount rate 1.078 1.162 1.253 1.351 1.456 1.570 1.693 1.825 1.968 2.121 2.287 2.466 div. payout rate (k) 0.247 Add to P/B PV(growth*AROE) 0.11 0.13 0.15 0.17 0.18 0.21 0.23 0.19 0.13 0.06 -0.01 -0.08 Cum P/B 1.11 1.24 1.39 1.56 1.74 1.95 2.18 2.36 2.49 2.55 2.55 2.47 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 1.42 1.70 1.90 2.12 2.36 2.63 2.92 2.37 1.65 0.81 -0.10 -0.98 Total P/B (P/B if we stop est. this period) 2.53 2.94 3.29 3.68 4.11 4.58 5.10 4.73 4.14 3.36 2.45 1.49 Implied price 16.15 18.73 20.97 23.44 26.17 29.18 32.50 30.15 26.38 21.40 15.61 9.48 Check: Beg. BV/Shr 5.91 6.79 7.88 9.17 10.70 12.53 14.70 17.29 19.81 22.11 24.00 25.34 Implied EPS 1.17 1.44 1.71 2.04 2.43 2.89 3.43 3.35 3.05 2.52 1.77 0.86 Implied EPS growth 0.231 0.190 0.190 0.190 0.190 0.190 -0.025 -0.090 -0.174 -0.295 -0.514 Inputs: 1. EPS Forecasts and long-term growth rate (LTG) are from Reuters (10/5/05). 2. Book value per share derived from 9/30/04 balance sheet. Total equity = 9,664M, common stock = 1,635M implying BVPS= 9,664/1,635= $5.91. 3. Discount rate: Used 20 year t-bond rate of 4.6% for risk-free rate, an expected return on the market of 10%, and Qualcomm’s beta estimated as 1.29 (from Reuters) yielding a CAPM discount rate of 7.81% (=0.046+1.4(.10-.046)). 4. Dividend payout ratio is the trailing 12 months reported by Reuters. 5. Next fiscal year-end is 9/05. 6. Current fiscal month is 12 (September) *I used September instead of October because Qualcomm has yet to report earnings and the FY1 forecast is for 9/05. 7. Target ROE=3.35%, the lagging 5 year Communication Equipment industry ROE reported by Reuters. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $9.48. 2. Changing the discount rate to 1.86% (-5.95%), the EBO valuation is $44.27. Thus, if the expectations in the model are realized, we should earn a return of approximately 1.86%/year. 3. Changing the growth rate to 68.98% (+50%), the EBO valuation is $44.40. 4. Changing the industry ROE to 18.98 (+15.58), the EBO valuation is $41.04. 5
  6. 6. II. Relative Valuation Comparables Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S 1 CSCO Cisco Systems Inc. 112,442 17.50 1.17 14.96 14.50% 1.03 4.90 11.50% 0.43 4.78 2 NOK Nokia Corp. 74,275 16.72 1.10 15.20 10.09% 1.51 4.66 27.13% 0.17 1.95 3 MOT Motorola Inc. 54,393 22.00 1.24 17.74 12.75% 1.39 3.71 33.00% 0.11 1.66 4 GLW Corning Inc. 28,455 18.52 0.97 19.09 20.22% 0.94 5.92 -30.83% -0.19 6.74 QCOM Qualcomm Inc. 72,961 45.16 1.44 31.36 18.98% 1.65 6.97 10.02% 0.70 14.51 Implied Price based on: P/E PEG P/B Value P/S 1 CSCO Cisco Systems Inc. $21.54 $28.19 $31.75 $27.66 $14.88 2 NOK Nokia Corp. $21.89 $41.17 $30.19 $11.15 $6.07 3 MOT Motorola Inc. $25.55 $38.03 $24.04 $7.30 $5.17 4 GLW Corning Inc. $27.49 $25.81 $38.36 -$12.47 $20.98 High $27.49 $41.17 $38.36 $27.66 $20.98 Low $21.54 $25.81 $24.04 -$12.47 $5.17 Median $23.72 $33.11 $30.97 $9.23 $10.47 Indicator Interpretation P/E Bearish- Higher P/E ratio than competitors, sector, industry, and market. Qualcomm is either (1) overvalued or, (2) the market expects Qualcomm to a have higher growth rate than competitors, sector, industry, and market or, (3) the market believes Qualcomm has less risk than its competitors. PEG (P/E/G) Bearish- Highest of all competitors in the communications equipment sector, suggesting that Qualcomm is overvalued or less risky. P/B Bearish- Qualcomm has a larger P/B than its competitors, meaning it is richly valued in comparison. Value (P/B/ROE) Bearish- Qualcomm has the highest value ratio out of all of its competitors. This might imply that the market is expecting higher future ROE’s from Qualcomm. P/S Bearish- Qualcomm’s P/S ratio is substantially greater than that of their competitors. Summary Qualcomm’s comparisons are extremely bearish and make the company seem overvalued and expensive. I believe that the recent increase in the stock price over the past three months has had an added affect on these ratios, making it look expensive to its competitors. 6
  7. 7. III. Technical Analysis 7
  8. 8. Indicator Interpretation Bollinger Bands Poised for a move. At top band- suggests Qualcomm is likely to move soon- either a breakout (bullish) or a reversal (bearish). Stochastics Bullish- %K=84.39, %D=81. Since %K is above %D and gap is increasing, bullish. Moving Averages Bullish- Price is above both long-run and short-run moving averages. Both the 25 day moving average and the 100 day moving average have been constantly moving upward with the stock price. MACD Bullish- The MACD has recently crossed and moved above its signal line, creating a better time to buy. Regression Bullish- Price is on an upward trend and is also just below it regression line. PriceROC Bullish- Price is higher than 100 days ago (i.e., positive momentum). In addition, the positive slope is increasingly widening the gap between the current price and the price 100 days ago. 8
  9. 9. IV. Earnings Analysis Earnings Surprises 6/05 3/05 12/04 9/04 6/04 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate 1,311.98 1,397.13 1,394.55 1,398.88 1,294.17 Actual 1,358 1,365 1,390 1,369 1,340.53 Difference 46.02 -32.13 -4.55 -29.88 46.36 Mean Earnings Estimates 9/05 This 12/05 Next 9/05 This 9/06 Next LT Growth Quarter Quarter Fiscal Year Fiscal Year Rate Earnings .33 .35 1.17 1.44 18.98% # Estimates 30 28 32 35 19 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Revised Up Revised Down Down Quarter ending 9/05 0 0 29 0 Quarter ending 12/05 0 0 13 0 Year ending 9/05 1 0 30 0 Year ending 9/06 1 0 18 2 Qualcomm has experienced negative earnings surprises until the recent earnings report last quarter, where they beat earnings by 3.51%. Analysts were probably surprised by Qualcomm’s recent earnings report because they failed to beat earnings the previous three quarters. I believe this is a positive indicator for future earnings surprises for quarters to come, which will have a bullish affect on the stock price. Qualcomm will have annual earnings of $1.17/share if they meet analysts’ expectations for the rest of the year. This is an encouraging increase in EPS compared to the two previous reports of $1.03 in 2004 and $.63 in 2003. Earnings revisions over the last four weeks have shown an increasing amount of upgrades compared to downgrades in terms of EPS. I believe that this might be because Qualcomm is approaching their earnings report for the fiscal year 2005 and analysts are forecasting a greater expected EPS. 9
  10. 10. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 13 13 12 12 Outperform 12 10 10 7 Hold 9 10 9 16 Underperform 0 0 1 0 Sell 1 1 1 1 No Opinion 1 1 1 1 Mean Rating 1.97 2.00 2.06 2.19 Analyst recommendations have been increasing over the past year to outperform/buy upgrades. The analyst consensus recommendations are that Qualcomm is rated an “outperform”, which is a bullish attribute to the future of the stock price. 10
  11. 11. VI. Institutional Ownership # of Holders % Beg. Holders Shares % Shares Shares Outstanding 1,629,092,438 100.00% Total Positions 771 107.83% 1,115,928,320 68.50% New Positions 89 12.45% 21,878,448 1.34% Soldout Positions 57 7.97% -5,540,439 -0.34% Buyers 411 57.48% 152,042,928 9.33% Sellers 355 49.65% -117,191,856 -7.19% Beg. Total Inst. Positions 715 100.00% 1,081,077,248 66.36% # Net Buyers/3 Mo. Net Chg. 56 7.83% 34,851,072 2.14% The net change of 56 new institutional investors is a bullish indicator for the stock price. In addition, institutional investors are increasing their positions and have purchased over 34 million shares in the past three months, an increase of 2.14%. The increase in institutional investors and an increase in their positions show that Qualcomm’s stock is more attractive to the market. 11
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