Tuesday, July 29, 2014

Here's Why I Added To My Position In Qualcomm

I added to my position in Qualcomm Inc (QCOM). Qualcomm designs, develops, manufacturers and markets digital communication products. Qualcomm's business segments include mobile device chipset manufacturing, mobile device royalties and strategic investments. Qualcomm is the leader in ARM-based chipset processors which can be found in the bulk of Android (GOOG), BlackBerry (BBRY) and Windows (MSFT) mobile devices. The licensing segment is used by almost all mobile device manufacturers including Apple (AAPL). The real winner from the smartphone/tablet/connected-cars wars really is Qualcomm. Qualcomm charges royalties on each handset sold based on its technology and one time licensing fees from handset vendors to use its proprietary technology.

Financials

Qualcomm's revenue per share, earnings per share (EPS) and free cash flow (FCF) per share are extremely healthy. In addition, Qualcomm has no debt and holds $16.63B in cash.



Qualcomm's industry leading processors are not only found in the latest Android, BlackBerry and Windows phones, but Qualcomm commands a formidable patent portfolio. Qualcomm currently generates 2/3 of its revenue from sales of mobile device chipsets and 1/3 of its revenue from royalties by licensing the technology. On  the earnings side, the numbers flip around - 2/3 from licensing and 1/3 from chip sales.

Dividends

Qualcomm is a Dividend Contender that has been raising dividends for 12 straight years in a row. The company has a 5-year dividend growth rate (DGR) of 16% and 10-yr DGR of 26.9%. The last dividend increase came in March 2014 with a hike of 20%. A current payout ratio of 34.50% gives QCOM plenty of room for future increases.


Valuation

With record profits and stock market all-time highs, companies have increased stock buybacks tremendously over the last few years. While this improves the EPS numbers of the stock, the book value takes a hit (read details here). While I am not completely against the idea of returning cash to stockholders via buybacks, I also like to make sure that the companies do not erode their book value. Being a value investor, I like to see the book value have healthy gains year-over-year. Qualcomm, during its March announcement, confirmed that they were increasing their stock repurchase program to $7.8B. However, due to the strong financials, the book value continues to grow and numbers stand at:

  • Book value growth of 4.1% in the last 12 months
  • Book value growth of 16.3% in last 5 years
  • Book value growth of 15.1% in last 10 years







Recent Buy Decision

  • Its business as usual with very agreeable growth in current markets. The smartphone/tablet wars between the different device manufacturers has one common element to it - Qualcomm. The business is robust and the innovation cutting edge. The strong patent portfolio brings QCOM a steady stream of revenue quarter after quarter.
  • A major source of growth in the short term is expected to come from China. China is in the midst of moving from 3G to 4G LTE wireless technology. China Mobile (CHL), which commands a respectable 65-70% of the Chinese wireless marketshare, has decided to offer discounts on smartphones that will run on Qualcomm's 4G LTE technology. In the recent announcement, CHL has backed five-mode LTE-enabled handsets, which should benefit QCOM.
  • Recent acquisition of Wilocity has allowed QCOM to leapfrog the competition in the small cell market. The 802.11ad network technology, also called the WiGig technology, uses the 60GHz radio frequency and boasts a much higher speed than the 802.11 g, n, ac standards with data transfer speeds of up to 7 Gbps.
  • Qualcomm has thrown its hat into the Internet of Things (IoT) movement by forming a smart home platform. With this initiative, QCOM is expected to target home devices such as Smart TVs, set top boxes etc. 
  • QCOM is also expected to benefit from the infant wearable market and if consumers latch on it this time, QCOM stands to benefit big from the chip sales and the licensing agreements similar to the smartphone/tablet market.
  • Another growth avenue in QCOM's future is the In-Car Entertainment systems and the development of vehicular networks. Apple and Google have started their push to provide a platform for integrating their platform into the cars. The common factor here again is the necessity to communicate with the base stations and QCOM stands to benefit from the chip sales and/or licensing.


Risks

  • On the technology front, Qualcomm competes with GSM mobile phone technology, which is wildly prevalent outside North America and is an open source technology.
  • As the world moves from 3G to 4G (LTE/WiMax), Qualcomm has lost some of the hefty royalty pricing power on OFDMA-based LTE technology as it commanded on CDMA technology.
  • On a corporate front, Qualcomm faces intense competition from Broadcom, Mediatek and Intel.
  • Market saturation in the smartphone market.
  • The foreign currency fluctuations may impact future results.



A summary of the stock:

  • Symbol: QCOM
  • Quote: $78.11
  • 52-week range: $60.82 - $81.66
  • P/E: 20.87
  • Forward P/E: 13.63
  • Debt: $12M
  • Yield: 2.15%
  • 5-yr average yield: 1.70%
  • 5-yr DGR: 16%
  • 10-yr DGR: 26.9%
  • Book value: 22.69
  • Graham Number: 43.70
  • Chowder Rule: 18.1
  • Mean Analyst Recommendation: Buy
  • Mean Analyst target: $85.61
What are your thoughts on the future prospects of QCOM?

Full Disclosure: Long QCOM. My full list of holdings is available here.



This article was written by Roadmap2Retire. If you enjoyed this article, please consider subscribing to my feed at [RSS].

3 comments:

  1. Since when did 9.4 bn USD in debt become no debt?

    I agree that they have very little debt in comparison to equity but to claim no debt is just wrong.

    ReplyDelete
    Replies
    1. Hi Fredrik,
      Where are you seeing the 9.4B figure? QCOM's current debt is $11-12M, which is negligible.

      The company holds more than $18B in cash and has refused to follow other industry peers into the bond market as the CEO has indicated that he'd rather QCOM stay debt free.

      regards
      R2R

      Delete
    2. Hi R2R,

      When reading their balance sheet as it was published for Q3 2014 on their homepage then we see that they have 9.57 billion USD in liabilities and 7.94 billion USD in cash.

      Where do you get your figures from?

      Delete

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