After beating EPS expectations and missing on revenues in its second-quarter fiscal 2014 earnings report, Qualcomm Incorporated's (NASDAQ:QCOM) stock declined 3.52% on April 24, the day after the announcement, but it has gained 2.7% since then. However, since the beginning of the year QCOM stock has risen 7.7%, while the S&P 500 index has risen 2.6%, and the Nasdaq Composite Index has declined 0.8%. Whereas QCOM has outperformed the market this year, since the beginning of 2013 QCOM stock has risen only 29.3%, while the S&P 500 index has risen 33.0%, and the Nasdaq Composite Index has risen 37.2%. Nevertheless, QCOM stock is a good combination of excellent value and strong growth dividend stock, and in this article, I will explain why, in my opinion, Qualcomm stock is a remarkably promising long term investment.
Qualcomm is a designer and manufacturer of advanced semiconductors for mobile phones and commercial wireless applications. Qualcomm Incorporated was founded in 1985 and is headquartered in San Diego, California.
The table below presents the valuation metrics of QCOM, the data were taken from Yahoo Finance and finviz.com.
Qualcomm's valuation metrics are very good; the company has no debt at all, and the Enterprise Value/EBITDA ratio is low at 13.60. According to Yahoo Finance, QCOM's next financial year forward P/E is low at 13.91 and the average annual earnings growth estimates for the next 5 years is very high at 15%, these give a very low PEG ratio of 0.93, one of the lowest among S&P 500 tech stocks. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Qualcomm has been paying uninterrupted dividends since 2003. On April 8, 2014, QCOM announced a cash dividend of $0.42 per share payable on June 25, 2014, to stockholders of record as of the close of business on June 4, 2014, which represents a 20 percent increase over its prior quarterly dividend. The forward annual dividend yield is at 2.10%, and the payout ratio is only 33%. The annual rate of dividend growth over the past three years was very high at 18.6%, over the past five years was also high at 14.9%, and over the past ten years was very high at 30.3%. I consider that besides dividend yield, the consistency and the rate of raising dividend payments are the most crucial factors for dividend-seeking investors, and QCOM's performance has been impressive in this respect.
Latest Quarter Results
On April 23, Qualcomm reported its second-quarter fiscal 2014 financial results, which beat EPS expectations by $0.09 (7.4%) and missed the consensus on revenues.
Second Quarter Results (GAAP)
- Revenues: 1 $6.37 billion, up 4 percent year-over-year and down 4 percent sequentially.
- Operating income: $1.99 billion, up 6 percent y-o-y and 33 percent sequentially.
- Net income: $1.96 billion, up 5 percent y-o-y and 4 percent sequentially.
- Diluted earnings per share: $1.14, up 8 percent y-o-y and 5 percent sequentially.
- Effective tax rate: 14 percent.
- Operating cash flow: $1.81 billion, down 18 percent y-o-y; 28 percent of revenues.
- Return of capital to stockholders: $1.59 billion, including $1.00 billion through repurchases of 13.4 million shares of common stock and $589 million, or $0.35 per share, of cash dividends paid.
Non-GAAP Second Quarter Results
- Revenues: $6.37 billion, up 4 percent y-o-y and down 4 percent sequentially.
- Operating income: $2.34 billion, up 5 percent y-o-y and 26 percent sequentially.
- Net income: $2.26 billion, up 9 percent y-o-y and 4 percent sequentially.
- Diluted earnings per share: $1.31, up 12 percent y-o-y and 4 percent sequentially.
- Effective tax rate: 15 percent.
In the report, Steve Mollenkopf, CEO of Qualcomm said:
We delivered another solid quarter, driven by demand for our leading multimode 3G/LTE chipset solutions and record licensing revenues. Looking forward, we are pleased to be raising our earnings per share guidance for the fiscal year. We continue to see increasing demand for our industry-leading chipsets and strong growth in calendar year 2014 of 3G/4G smartphones around the world.
Competitors and Group Comparison
A comparison of key fundamental data between Qualcomm and its main competitors is shown in the table below.
Source: Yahoo Finance, finviz.com
Qualcomm's valuation metrics look better than those of its main competitors. QCOM has a lower P/E ratio, a lower PEG ratio, and strongest earnings growth prospects.
Qualcomm's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the tables below.
Personally I am using only fundamental analysis for my investment decisions. After many years of experience, and after having tried all kinds of decisions making including technical analysis, I have reached the conclusion that relying on fundamental information is giving me the highest return. Nevertheless, some investors are successfully using technical analysis to find the proper moment to start an investment (I am not talking about traders; my analysis is only for investors). The charts below give some technical analysis information.
The QCOM stock price is 0.82% above its 20-day simple moving average, 2.10% above its 50-day simple moving average and 11.10% above its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at -0.00 and descending, which is a slight bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 62.55 which do not indicate oversold or overbought conditions.
Analyst opinion is divided but most of them recommend the stock. Among the forty two analysts covering the stock, thirteen rate it as a strong buy, nineteen rate it as a buy, eight rate it as a hold, one analyst rates it as an underperform, and one analyst rates it as a sell.
TipRanks is a website that ranks analysts according to their performance. According to TipRanks, among the analysts covering QCOM stock there are only fifteen analysts who have the four or five star rating and twelve of them recommend the stock. On April 14, Deutsche Bank's analyst Brian Modoff reiterated a buy rating on QCOM with a price target of $86. I consider Mr. Modoff's analysis very valuable, since he has 5-Star rating from TipRanks for the accuracy of his previous calls.
In its recent report, QCOM said that it sees increasing demand for its industry-leading chipsets and strong growth in calendar year 2014 of 3G/4G smartphones around the world. As a result, the company raised its earnings per share guidance for the fiscal year. Qualcomm's undisputed technology leadership in 4G should benefit the company as China finally begins to ramp 4G LTE networks, and handset sales follow. QCOM should benefit also on the royalty side, as emerging markets convert from 2G to 3G, which is a technology for which QCOM receives revenue. The license and royalty fee segment (QTL) accounted for about 30% of total sales. QCOM receives royalty fee when customers like Samsung, LG Electronics and Motorola sell CDMA-based equipment.
Qualcomm generates lots of cash flow, and it has an extremely strong balance sheet; cash & investments were $32.1 billion at mid-year FY14, and the company has no debt at all. Qualcomm returns value to its shareholders by stock buyback and by increasing dividend payments. In November 2013, Qualcomm provided an update to its capital allocation strategy, including setting a target of returning 75% of free cash flow to shareholders. Qualcomm paid $4.61 billion in its FY'13 and $2.0 billion in the first two quarters of FY'14 to repurchase its own shares.
Qualcomm has compelling valuation metrics and strong earnings growth prospects, and it has a remarkably low PEG ratio of 0.93, one of the lowest among S&P 500 tech stocks. The company has an extremely strong balance sheet, and it has no debt at all. Qualcomm returns value to its shareholders by stock buyback and by increasing dividend payments. In addition, Qualcomm's undisputed technology leadership in 4G should benefit the company as China finally begins to ramp 4G LTE networks. All these factors bring me to the conclusion that QCOM stock is a smart long-term investment. Furthermore, the rich growing dividend represents a gratifying income.
Disclosure: I am long QCOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.