Qualcomm (QCOM) stock price has been on an uptrend by rising 26% from its 52-week low of $59.02 reached in July 2013. Given the reasons discussed below, I believe the price momentum will continue to build.
Valuations are inexpensive…
Despite the solid run-up, Qualcomm shares' forward (next 12 months) P/E multiple of 14.1% still trades at an 8% discount to the same multiple of S&P 500 Index, which stands at 15.3x (see chart below).
I view the current market discount should present a compelling entry point for investors given that 1) Qualcomm's consensus long-term earnings estimate of 13.0% is considerably above the average of just 8.5% for S&P 500 companies; 2) the stock offers a 1.9% dividend yield, which is in line with S&P 500 Index average at 1.9%, however, annual dividend growth has averaged at 20% since 2010, which is superior than the growth level for a majority of dividend-paying companies; and 3) market sentiment on the stock remains high as approximately 75% of total analyst ratings are strong buy or buy. By factoring in Qualcomm's strong earnings growth potential, the stock's PEG of 1.1x is almost 40% below the 1.8x PEG for S&P 500 Index.
The shares' trailing P/E multiple of 18.5x trades below its 3-year average at 20.7x (see chart below). It appears that the declining valuation can be explained by decreasing EPS growth rate as the current 13.0% consensus long-term EPS growth estimate is below the EPS CAGR of 19.5% for fiscal 2011 to fiscal 2013. To me, this suggests that Qualcomm's current valuation level is very reasonable.
There are a few upside catalysts…
Owing to the inexpensive and reasonable valuation, I believe the following potential catalysts should drive a further meaningful price appreciation going forward:
- China Mobile (CHL) is expected to expand its LTE coverage from 16 cities at present to 340 by the end of 2014. It is believed that the Chinese LTE rollout will materially increase sales smartphone sales volumes from Chinese and global leading OEMs. Given that these OEMs rely on Qualcomm's LTE chipset designs and the company currently has no business in this market, I am of the view that the LTE launch in China will bring in significant incremental revenue.
- According to GSMA, there are only 175M, or 3%, of the total global smartphone users were covered by LTE network in Q3 2013. Ericsson predicts that global LTE subscriptions should grow by a 55% CAGR over the period from 2013 to 2019, which should continue to provide solid support to Qualcomm's top line growth going forward.
- Management announced a target to increase operating expense by 5% to 7% in 2014. I expect Qualcomm will benefit from an operating leverage and should see a meaningful margin expansion in the year given that market's current consensus revenue estimate calls for a faster growth rate at 8.0%.
- Since 2010, management has raised dividend by an average annual rate of 20%. In addition, there is $3.8B leftover on the company's existing share repurchase program. In light of Qualcomm's solid cash flow generating capability and its $31.6B net cash, I expect management will continue buying back shares as planned and maintain the current dividend growth pace, which should buttress the share price.
In summary, I believe Qualcomm stock represents a quality investment at the current price level given its inexpensive valuations, the company's healthy growth prospects, and management's commitment to returning cash. Hence, a buy rating should be warranted.
All charts are created by the author except for the consensus estimate tables, which are sourced from S&P Capital IQ, and all financial data used in the article and the charts is sourced from S&P Capital IQ unless otherwise specified.