After a sharp drop in its stock price, now is an excellent opportunity for long-term investment in Qualcomm (NASDAQ:QCOM) stock at a cheap price. In my opinion, there is a good chance that Qualcomm will succeed to resolve the issues in China. Qualcomm has compelling valuation metrics and strong earnings growth prospects, and it has a remarkably low PEG ratio of 0.89. The company has an extremely strong balance sheet, and it has no debt at all. Furthermore, Qualcomm returns value to its shareholders by stock buyback and increasing dividend payments.
Qualcomm is a designer and manufacturer of advanced semiconductors for mobile phones and commercial wireless applications. The company was founded in 1985 and is headquartered in San Diego, California.
The table below presents the valuation metrics of QCOM, and 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 11.61. According to Yahoo Finance, QCOM's next financial year forward P/E is low at 13.29 and the average annual earnings growth estimates for the next five years is very high at 15% - these give a very low PEG ratio of 0.89, 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.
Dividend and Share Repurchase
Qualcomm has been paying uninterrupted dividends since 2003. The forward annual dividend yield is at 2.27%, and the payout ratio is only 32.8%. 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.
Source: Charles Schwab
Since the company generates lots of cash, and the payout ratio is low, there is a good chance that the company will continue to raise its dividend payment.
On March 03, 2014, Qualcomm announced that its Board of Directors has approved a 20 percent increase in the Company's quarterly cash dividend and, effective immediately, a $5.0 billion increase in its stock repurchase authorization. The $5.0 billion increase in the stock repurchase program brings the current authorization to $7.8 billion. Prior to this increase, $2.8 billion remained available under the stock repurchase program. Qualcomm has repurchased $3.35 billion in stock through 3Q14. For FY13, Qualcomm returned $6.7 billion to shareholders in the form of share buybacks ($4.61 billion) and dividends ($2.06 billion).
Source: Qualcomm Q3 FY14 Earnings
Latest Quarter Results
On July 23, Qualcomm reported its third quarter fiscal 2014 financial results, which beat EPS expectations by $0.22 (18%) and beat the consensus on revenues.
Third-Quarter Results (GAAP)
- Revenues: $6.81 billion, up 9 percent year-over-year (y-o-y) and 7 percent sequentially.
- Operating income: $2.08 billion, up 24 percent y-o-y and 4 percent sequentially.
- Net income: $2.24 billion, up 42 percent y-o-y and 14 percent sequentially.
- Diluted earnings per share: $1.31, up 46 percent y-o-y and 15 percent sequentially.
- Effective tax rate: 10 percent.
- Operating cash flow: $2.67 billion, up 29 percent y-o-y; 39 percent of revenues.
- Return of capital to stockholders: $2.06 billion, including $1.35 billion through repurchases of 17.0 million shares of common stock and $706 million, or $0.42 per share, of cash dividends paid.
Non-GAAP Third-Quarter Results
- Revenues: $6.81 billion, up 9 percent y-o-y and 7 percent sequentially.
- Operating income: $2.43 billion, up 19 percent y-o-y and 4 percent sequentially.
- Net income: $2.47 billion, up 35 percent y-o-y and 10 percent sequentially.
- Diluted earnings per share: $1.44, up 40 percent y-o-y and 10 percent sequentially.
- Effective tax rate: 13 percent.
Source: Qualcomm Q3 FY14 Earnings
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 has a lower P/E ratio, a lower PEG ratio, and stronger earnings growth prospects than TXN and INTC, however, BRCM has even lower ratios.
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.
The charts below give some technical analysis information.
The QCOM stock price is 3.78% below its 20-day simple moving average, 5.92% below its 50-day simple moving average and 2.16% below its 200-day simple moving average. That indicates a short-term, a mid-term and a long-term downtrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is negative at -1.04 and descending, which is a bearish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 41.59 which do not indicate oversold or overbought conditions.
Analysts' opinion is divided, but most analysts recommend the stock. Among the forty-two analysts covering the stock, 12 rate it as Strong Buy, 21 rate it as a Buy, eight rate it as a Hold, and one analyst rates it as an Underperform.
TipRanks is a website that ranks analysts according to their performance. According to TipRanks, among the analysts covering QCOM stock there are only fourteen analysts who have the four or five star rating, ten of them recommend the stock, and the other four top analysts rate the stock as a Hold.
On July 24, Goldman Sachs maintained a Conviction Buy on Qualcomm and lowered its price target to $88.00 (from $95.00). Analyst Simona Jankowski noted royalty challenges in China hurt its outlook for March.
Although Qualcomm reported on July 23, results that were much better than analysts' expectations, and the stock dropped 6.7% in the next trading day. The reason for the sharp decline in the stock price was Qualcomm's outlook for the September quarter that was below Wall Street's expectations. The company said that it is currently in a royalty dispute with a major customer in China. Moreover, some small companies are yet to agree on royalty payment. Some companies are also under-reporting the amount of phones sold, for which they should have paid license fees, and some tablet makers using Qualcomm technology have never signed licensing agreements. Most of Qualcomm's revenues come from selling chips for mobile devices, but most of its earnings come from licensing patents for its CDMA cellphone technology. Qualcomm also has faced legal and regulatory problems in China, including an antitrust investigation.
In my opinion, the market reaction to the issues in China was exaggerated. Although China is a major market for Qualcomm, there is a good chance that the company will succeed to resolve the issues. According to investors.com, "Qualcomm has been in similar situations in the past, and while periods of uncertainty followed, the company has a track record of successfully resolving the issues," wrote analyst Anil Doradla at William Blair in a research note. "While we acknowledge the unique challenges posed in dealing with the Chinese government and Chinese manufactures, we believe Qualcomm's Chinese counterparts will want to resolve the licensing issues on an amicable basis, given their global aspirations."
Qualcomm has been able to show an earnings per share surprise in each one of the last three quarters, as shown in the table below.
Since the company has succeeded to beat analysts' expectations in the last three-quarters, there is a good chance, in my opinion, that Qualcomm will continue to surprise by reporting better than estimated results also in the future.
QCOM's stock has underperformed the market this year and in 2013. Since the start of the year, QCOM's stock is down 0.5% while the S&P 500 index has risen 4.5%, and the Nasdaq Composite Index has increased 4.7%. Moreover, since the beginning of 2013, QCOM's stock has gained only 19.4%, while the S&P 500 index has increased 35.4%, and the Nasdaq Composite Index has risen 44.8%. However, after the retreat in its stock price, and considering QCOM's compelling valuation metrics, strong earnings growth prospects, and its leading position in the mobile market, it is now, in my opinion, an excellent opportunity to buy a good stock at a cheap price.
In my opinion, there is a good chance that Qualcomm will succeed to resolve the issues in China. Qualcomm has compelling valuation metrics and strong earnings growth prospects, and it has a remarkably low PEG ratio of 0.89. The company has an extremely strong balance sheet, and it has no debt at all. Furthermore, Qualcomm returns value to its shareholders by stock buyback and increasing dividend payments. 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: The author is long QCOM, INTC. 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.