Qualcomm: A Buy On Strong Mobile Phone Sales

| About: Qualcomm Inc. (QCOM)

We live in a world today where smart phones are all around us. There is no debate over that fact. The industry is very competitive, and unit sales are increasing year over year. Apple (NASDAQ:AAPL) has the iPhone, Research in Motion (RIMM) has the Blackberry, and there are a number of other major phone players out there.

But inside all of those phones are chips, and lots of them. Qualcomm (NASDAQ:QCOM) is the largest company by market cap in this space, so you would think the stock has done well lately with all of the buzz over the success of the iPhone 4S, a phone which has chips supplied by Qualcomm. Well, you'd be a little off. Despite 2011 fiscal year (ending in September) revenues up 36%, and earnings per share (non-GAAP) up 30%, Qualcomm's stock only managed to rise 14.7%, and that includes gains from stock buybacks and dividends. Qualcomm is up about 10% so far in its 2012 fiscal year, but I think that the stock is ready for its next move up.

Here are some basic financial numbers for the company to look at.

(Non-GAAP) 2009 2010 2011 2012* 2013*
Revenues $10.39B $10.98B $14.96B $18.44B $20.69B
Diluted EPS $1.31 $2.46 $3.20 $3.57 $3.99
End FY Price $43.03 $43.69 $50.10 - -

Qualcomm underperformed its revenue and earnings growth in 2011, but I think that it could regain some of those "losses" in 2012. In terms of device estimates, Qualcomm projected (as of their latest quarterly report) a midpoint of 775 million device shipments for calendar year 2011 and 900 million for 2012. That is nice growth. Current analyst estimates call for 23% revenue growth in fiscal 2012 and 12% in fiscal 2013. However, earnings per share might not grow at the same rate as prices could come down a little, which will eat into margins. The company had a record year in fiscal 2011, and they seem very excited for their position going into 2012 and beyond. Expect more record years ahead.

Given that the iPhone 4S and other phones have done incredibly well, I think that the company could raise guidance when it reports earnings in the next month or so. Here's how their latest guidance update stands against the current street estimates.

Guidance* Company Street
Q1 Revenues $4.35B to $4.75B $4.57B
Q1 EPS $0.86 to $0.92 $0.90
FY Revenues $18.0B to $19.0B $18.44B
FY EPS $3.42 to $3.62 $3.57

Now the street is a hair above the midpoint of revenue guidance and a penny above for EPS guidance. Qualcomm has beat by 2 cents the past two quarters, and six and ten cents in the previous two quarters. A beat of two cents would be the top end of their range, at 92 cents. Since the street is currently below the midpoint of full year revenue guidance, any raise in guidance could put the low end of the range at the current street midpoint. That is a positive sign. The only cautious note here is that full year street EPS estimates are five cents above the company's guidance, so we would need at least a nickel raise in EPS guidance to get the midpoint to current estimates. That could cause some pause with investors if the midpoint is below expectations.

As of the latest count, 36 analysts had either a buy or strong buy on the name, with 7 holds and one sell. That's a fairly bullish sign. The mean price target is $65.82, with the median at $67 and the high at $75. Any beat on a strong first quarter will push those numbers higher.

Now, Qualcomm's margins were down in 2011, but the operating and profit margins are still a bit higher than those in 2009, as you can see from the following chart.

Margins 2009 2010 2011
Gross 70.88% 69.94% 67.39%
Operating 24.47% 33.94% 33.60%
Profit 15.33% 29.57% 28.48%

If you look at the competitors page for Qualcomm on Yahoo! Finance, you'll notice that they list Broadcom (BRCM), Nokia (NYSE:NOK), and Texas Instruments (NYSE:TXN). These three names are competitors, but do have some other product lines that don't make them 100% comparable. However, Qualcomm's margins are the highest of these four names, which is why I like the stock. Companies can grow revenues all they want, but if they can't translate those revenues into profits, what's the point. Qualcomm's margins may tick down a little in 2012, but a 28% profit margin is quite nice, and still nearly double what it was just a few years ago. As long as they can keep their operating margins in the low to mid 30s and the profit margins in the high 20s, this is an extremely viable investment.

Qualcomm has plenty of growth ahead, and I think this is a great time to get in. The iPhone is doing extremely well, and Qualcomm is in a great position to reap those benefits. The stock has been up over the past few years, although it could have done better. That leads to a buying opportunity, especially before this quarter's results come in. Also, the company is paying out 86 cents a share (annually) in dividends, so you are getting paid while you wait for this growth. Analysts see this stock rising 10 points in the next year, and I think that's entirely possible given the expected growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.