- We pitch two companies from the technology sector, Qualcomm and Broadcom, against one another in the latest instalment of our Head-To-Head series.
- The article focuses on the relative strengths and weaknesses of Qualcomm and Broadcom based on business performance and sustainability/dividends/forecasts.
- It ends with discussion of the current valuations of the two companies, and details whether Qualcomm represents good relative value at current price levels.
Qualcomm (NASDAQ:QCOM) was founded in 1985 and is headquartered in San Diego, California. It operates in four segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), Qualcomm Wireless & Internet (QWI), and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on CDMA, OFDMA and other technologies for use in voice and data communications, networking, application processing, multimedia and global positioning system products. The QTL segment grants licenses to use portions of its intellectual property portfolio. The QWI segment provides fleet management, satellite- and terrestrial-based two-way wireless information and position reporting and other services, software and hardware to transportation and logistics. The QSI segment invests in early-stage companies that support the design and introduction of new products and services, as well as holding a wireless spectrum license.
Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.
We analyze each company relative to the other on the following criteria within each of our two main buckets:
- Return on equity
- Return on assets
- Operating margins
- Quarterly revenue growth
- Quarterly earnings growth
- Debt to equity ratio
- Interest cover
- Dividend payout ratio
- Forward yield
- Annual EPS growth forecast
Once we have analyzed the two companies based on the first two buckets, we can then assess whether they represent good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.
- Forward price to earnings ratio
- Price to book value ratio
- Enterprise value to EBITDA
- Price to three-year average free cash flow ratio
- Five-year price to earnings growth ratio
So, for example, a company that performs well compared to its rival on the first two buckets (business performance and sustainability/dividends/forecasts) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.
Return on equity
Return on assets
Quarterly rev. growth
Quarterly EPS growth
Debt to equity ratio
Dividend payout ratio
Forward dividend yield
Annual EPS growth forecast
As you can see, Qualcomm beats Broadcom in all but one of the criteria from the two buckets. While Qualcomm is able to deliver highly impressive return on equity of 17.09%, Broadcom is some way behind on just 4.78%. Furthermore, Qualcomm's return on assets and operating margins are also considerably ahead of those of Broadcom, which indicates that the former is a lot more profitable than the latter. What really impresses us about this is that Qualcomm is much more profitable than Broadcom despite it having next to no debt. Sure, Broadcom's debt to equity ratio is very low at just 16.20%, but the fact that Qualcomm is a lot more profitable in spite of lower debt levels shows just how strong its returns are.
Furthermore, Qualcomm was able to grow the top and bottom-line at a faster rate than Broadcom last quarter, with the former posting impressive numbers of 4% and 5% for revenue and earnings growth, respectively. Broadcom was some way off and saw growth of only 1.1% in the top-line and a fall of 13.60% in the bottom-line although the company did deliver results that were ahead of expectations. Furthermore, it expects strong momentum over the coming years, as shown by its strong annual EPS growth forecast number of 25.78%. This easily beat Qualcomm's 10.83%, although we still view Qualcomm's forecasts as being impressive.
Meanwhile, Qualcomm offers a better yield than Broadcom (2.1% versus 1.3%) and also has the potential to increase it considerably. That's because its payout ratio is just 33%, which is fairly low and compares favorably to its peer.
Overall, a comfortable victory for Qualcomm in the first two buckets and we're impressed with the company's scores.
Due to its strong performance in the first two buckets it would be of little surprise for Qualcomm to trade at a sizeable premium to Broadcom. Let's see if it does.
Forward price to earnings ratio
Price to book ratio
Price to free cash flow ratio
Although Qualcomm does trade at a premium to Broadcom on three of the five valuation metrics, it trades at a discount on the other two. Indeed, for the valuation metrics on which it trades at a premium to Broadcom, Qualcomm's premium is not as large as we would expect. For instance, its P/E ratio is just 15.6% higher, while its price to book ratio is 34.5% higher, which is less than we would expect due to its strong showing in the first two buckets.
Furthermore, Qualcomm's PEG ratio is more attractive than that of Broadcom (1.03 versus 1.68) and this shows that the company could offer a lot of potential over the long term, as it appears to provide an attractive mixture of value and growth. Meanwhile, an EV/EBITDA ratio that is 16.2% lower than its rival highlights that there could be a mispricing between the two stocks.
Overall, we feel that Qualcomm is undervalued compared to its peer and, as such, could outperform Broadcom going forward.
Qualcomm is a high quality company that posted impressive scores on our rating system. Indeed, its scores were ahead of those of sector peer, Broadcom, in nine of the ten criteria in the first two buckets. Furthermore, when it comes to valuations, Qualcomm seems to offer good value compared to its peer since it trades at a discount on two of the valuation criteria and at a smaller premium than we feel it should do on the others. As a result, we believe that it could outperform Broadcom going forward.
Feedback Request: Which stocks do you want to see go head-to-head against Qualcomm in future articles? Please comment below!