Seeking Alpha
Long/short equity, contrarian, independent research, tech
Profile| Send Message|
( followers)  

In a sense, I really hate this market. Why? Everything seems to be appreciating on a pretty consistent basis, making it tough to buy in when it's time to deploy some capital. Now, while I am completely cognizant of the fact that the printing presses at the Fed are working overtime to ensure that this liquidity limbo continues for a good while longer, it's becoming ever-so-frustrating to get good deals on quality companies. Qualcomm (NASDAQ:QCOM), a company that I've been a huge fan of for quite some time, finally gave me a chance to buy it on-sale, and I was pounding the table both on my StockTalks and in articles to buy this under $63. I still think there's still quite a bit more room to run.

The Drop Was Temporary

After the "scary" drop from $66 to $61.38 or so, the sentiment briefly turned negative on the name. When you run into these kinds of drops, just head on over to StockTwits, and you'll see the same "twits" parroted over and over again. In Qualcomm's case, they went something like:

  • <Technical Analysis Mumbo Jumbo> THIS SEES $53!
  • Broadcom (NASDAQ:BRCM) will eat Qualcomm's lunch, Qualcomm going below $60!
  • They missed estimates! What a lousy company!

And it went on and on. Smart money, while perhaps slightly perturbed by the drop in QCT operating margins, recognized that the QTL profit stream was still great, and further recognized that the company had now raised full-year guidance twice... precisely due to QCT market share leadership. Just because Qualcomm missed the overly-optimistic analyst estimates doesn't mean that the shares deserved that kind of whack for more than a week or two.

I'm confident that as we get into the back half of the year, Qualcomm will continue to perform quite admirably as I don't see any real negative catalysts (that aren't macro) on the horizon. The firm is taking market share in apps processors, it's shipping modems like crazy, and it's collecting profits from every single 3G/4G device sold. It's a utility coupled with a nicely growing semiconductor stock. What's not to like?

Dividend Growth Story Will Get More Important

As I've said before, Qualcomm is an interesting dividend growth story now. The payout ratio is still quite low at about 37% of GAAP EPS, and given that this is not a capital intensive business, I see no reason why the payout ratio can't be improved significantly, especially in light of the fact that Qualcomm isn't too aggressive on spending FCF on buybacks. I expect Qualcomm to pull an "Intel," so to speak, and have several years of very consistent dividend increases that should make yield on shares purchased at these levels quite attractive (although the 2.2% or so that shares currently yield isn't bad).

Broad Market Lifts All Boats

Remember how I complained that there aren't enough good deals on the market today? Well, this means that when the money keeps pouring in, the laggards will get some love. And, unfortunately, despite a nice run in 2012 from its $53 low, Qualcomm has been an underperformer in 2013:

QCOM Chart

QCOM data by YCharts

Not only do I believe that semiconductors/tech will start to get some loving as investors begin to rotate out of overachievers such as consumer staples, but I believe that "best of breed" stocks that have been down - but not out - will outperform by an even larger degree. Why? People are going to put all of their money somewhere, and it might as well be in a rock solid company that isn't busting through new all-time highs (yet).

Conclusion

On a pullback, Qualcomm is definitely intriguing. While I do have some concerns about what the apps processor/modem competitive landscape will look like a year from now with Intel, Nvidia (NASDAQ:NVDA), and Broadcom leading a valiant charge (I like all three of these companies a lot) investors can rest assured that Qualcomm will still be a force to be reckoned with, especially as its fortunes are much more levered to broad cellular device shipments than to particular apps processor/modem design wins.

Source: Qualcomm: Still More Room To Run