Qualcomm (QCOM) once again proved strong fundamentals during the recently quarterly results. The Street has since boosted EPS targets with all 38 revisions up for a net change of 4.4%. As Spreadtrum (SPRD) relatively struggles, investors have an opportunity to capitalize on Qualcomm's outperformance during a recovery. Based on my multiples analysis and review of the fundamentals, I find considerable upside for Qualcomm.
From a multiples perspective, Qualcomm is by far the more expensive of the two. It trades at a respective 22.2x and 14.8x past and forward earnings while Spreadtrum trades at a respective 6.9x and 6.3x past and forward earnings. In addition, Spreadtrum also offers a dividend yield that is 100bps higher at 2.4%. As much as this premium gives investors pause, once should consider that Qualcomm's PE multiple is 87% of the 5-year average.
At the recent first quarter earnings call, Qualcomm's CEO, Paul Jacobs, noted a stellar start to the year:
"We're very pleased to report record revenues, earnings per share and MSM shipments this quarter driven by increased demand for smartphones and data-centric devices across an expanding number of regions and price points. It was a very successful quarter, and we're pleased to be raising our financial outlook for fiscal 2012. QCT continues to execute and is well positioned to take advantage of the many opportunities ahead.
We announced the expansion of our Snapdragon S4 processor road map, demonstrated Windows 8 running on an MSM8960-based device over LTE and had several partners launch noteworthy devices based on our solutions. Our Licensing business had another strong quarter as well, driven by the global adoption of smartphones and other connected devices".
End market demand is finally starting to pick up and Qualcomm has an attractive portfolio of products to penetrate the WCDMA chipset market. The firm is the top supplier in the digital wireless market, reigning supreme in CDMA. It is further well exposed to favorable trends in the 3G market with an excellent combination of chip and IPR offerings. Furthermore, management is impressively improving an already strong balance sheet. Roughly $5.2B is expected to be added to the firm's net cash position over the next two years. With free cash flow yield at 4.2%, management may explore getting more aggressive with share repurchases to boost ROE.
Consensus estimates for Qualcomm's EPS forecast that it will grow by 16.9% to $3.74 in 2012 and then by 11% and 13.5% in the following two years. Assuming a multiple of 20x and a conservative 2013 EPS of $4.12, the rough intrinsic value of the stock is $82.40, implying 33.9% upside.
Turning over to Spreadtrum, we find a company that has indicated slowing sales momentum for the beginning of the year. While the Android 2.2 TD-SCDMA smartphone does a nice job showcase the strength of Spreadtrum's solutions, Nokia is undergoing a bit of a turnaround and locking out market share gains in emerging markets, like China. Furthermore, the delay in launching its smartphone platform has made investors hesitant over execution. TD shipments were sequentially flat in the fourth quarter, but meaningful penetration of the 2G market is in sight. Going forward, the company will most likely shift its GSM products over to 40nm, mainly as a means to improve margins.