Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Summary

  • Analysts at Goldman Sachs take profits on Qualcomm, yet remain long-term optimistic.
  • I share the analysis as long-term potential remains, with potential triggers being able to provide momentum later this year with few short-term triggers at the horizon.
  • Solid technological leadership, fair valuation, rock solid balance sheet and strong shareholder payouts support appeal.

Qualcomm (NASDAQ:QCOM) received a little less love from analysts at Goldman Sachs who are cashing in some of the gains on their bullish call.

This does not mean that Goldman has turned bearish on the stock, as a matter of fact they still like the stock in the long run as do I. This makes me a cautious buyer as well with multiple potential triggers allowing for improved returns in the second half of 2014.

Goldman Turns More Cautious

Analyst Simona Jankowski has downgraded Qualcomm from conviction buy to buy, while leaving its price target of $95 per share unchanged.

The stock has been removed from the conviction list, as the potential catalysts behind the original call have largely played out. When placing shares on the conviction buy list back in November of last year, Jankowski was looking for more aggressive capital allocation, chipset margin expansion and resilient royalty ASPs.

From this point in time, there is no material upside compared to consensus estimates, while the company might even see near-term downside. This is as Jankowski has lowered the June and September estimates due to anticipated weaker handset demand. This would be driven by the anticipation of the iPhone 6 launch, weaker 3G shipments in China ahead of the 4G ramp-up, and softer demand in Europe.

The long-term buy recommendation remains warranted given the relative undervaluation to the solid growth and return profile of the business. Furthermore, the three issues mentioned above are short term and transitory, but they could result in little momentum during the quarter.

Most Recent Update

The latest update from Qualcomm to investors dates back to the second-quarter earnings release back at the end of April. The company stressed solid demand for 3G/LTE solutions and record licensing sales, while anticipating solid growth of 3G/4G smart phones around the globe.

For the year, a solid 1.22-1.30 billion device shipments are anticipated, yet stagnating average selling prices are limiting royalty sales growth.

Valuation

Qualcomm ended the quarter with $32.1 billion in cash and equivalents. Note that only $8.4 billion of this has been held domestically, with foreign cash holdings not being easily accessible for domestic acquisitions, dividends or repurchases without incurring multi-billion repatriation charges. The company has no debt, resulting in a very strong solid net cash position.

For the current year, revenues are anticipated between $26 and $27.5 billion, according to the company, which sees GAAP earnings come in between $4.37-$4.57 per share, or around $7.5 billion.

Trading at $80 per share, equity is valued at $135 billion which values operating assets at around $103 billion after backing out the net cash position. This values operating assets at 3.9 times sales and 13-14 times earnings.

Returning Cash To Investors, Qualcomm Has Answered Goldman's Capital Allocation Request

Qualcomm has answered Goldman's request to pay out some more of its massive cash holdings to investors. In the first quarter, the company repurchased $2 billion worth of shares at a rate of 6% per annum.

The company, furthermore, hiked its dividend by 20% to $0.42 per share, providing investors with another 2.1% dividend yield on top of that.

It should be noted that the board still has $7.8 billion in share repurchases being authorized at the moment. Once completed, the repurchase program would have depleted most of the domestic cash balances, assuming no operational domestic cash flows in the meantime.

Takeaway For Investors

Goldman is taking some profits, but remains optimistic about Qualcomm's long-term outlook. This is not strange, as the firm holds leading positions and intellectual property, thereby standing to benefit from further smart phone growth. Qualcomm has furthermore five-folded its revenues over the past decade and has turned itself into a cash-cow machine. Annual earnings of $7.5 billion are very sizable, so is the very high net cash position.

As such, Goldman is just taking the foot off the gas pedal in the short to medium term, remaining bullish in the long term. This is warranted for the reasons mentioned above, steady growth and a still rather modest valuation. Remember that while repurchases and dividends are aggressive, the company has the balance sheet capacity to maintain or even increase the pace of shareholder returns.

Having grown more impressed with the company's intellectual property portfolio and leading techniques, I remain cautiously bullish as well. A cash repatriation holiday, a quicker adoption of its technologies in China, and a potential new Apple iPhone launch, all act as potential triggers later this year.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Qualcomm - Goldman Takes Some Profits, Remains Long-Term Bullish