Qualcomm: More Noise To Ignore

| About: Qualcomm Inc. (QCOM)

Summary

The quarterly results for Qualcomm include lots of noise including typical weak guidance for the wireless chip giant.

The company continues to use the strong balance sheet to reward shareholders including the recent 10% dividend hike.

The stock remains a buy at $50 with several business related catalysts supported on the downside by strong stock buybacks.

After the close on Wednesday, Qualcomm (NASDAQ:QCOM) did the standard beat and guide down for the next quarter. The stock traded down back to the key $50 threshold, but investors shouldn't necessarily lock onto the claimed weak guidance.

Source: Qualcomm presentation

Due to ongoing licensing issues in China that include under reporting of device sales, Qualcomm is somewhat forced to guide conservatively. The wireless chip and technology leader has routinely surpassed internal EPS estimates and analyst estimates by a solid margin over at least the last five quarters. The four quarters of 2015 had average beats of 5%.

Click to enlarge

Source: Yahoo Finance

The prime example is FQ2 where the company reported an EPS of $1.04 after guiding to an EPS target of between $0.90 to $1.00. Despite the continuous quarterly beats, analysts placed their targets at $0.96 based on the guidance setting up the $0.08 beat. The prior quarters had similar guidance ranges where Qualcomm ultimately exceeded the top end of the range.

The initial guide downs over the last year is what played a partial role in the massive stock decline that culminated with a multi-year low at $42.24 in early February. The ironic part is that Qualcomm is all too eager to take advantage of the lower prices with large stock buybacks.

The key now is a reversal of the declining earnings trends. For the June quarter, Qualcomm earned $0.99 last year and the guidance for this year with a typical beat sets the wireless company up for an actual YoY EPS increase.

One big help to the turnaround to the earnings trends are the large stock buybacks. For the last quarter, Qualcomm returned $1.5 billion to shareholders via purchasing 31.7 million shares. As well, the company paid a $0.48 dividend that cost $710 million. A 10% dividend hike goes into effect this quarter providing a yield over 4%.

The stock buybacks come on the backs of spending over $11 billion during FY15. As the chart below highlights, the key to the buybacks are that the amounts surged as the stock declined over the last three years.

QCOM Chart

QCOM data by YCharts

The key takeaway is that the quarterly reports provide a lot of noise for investors to wade through. Qualcomm has to deal with under reporting licenses in China causing the weak guidance though about every quarter the company solves another license issue including both LG Electronics (OTC:LGEAF) for FQ3.

My previous recommendation holds - the bottom in the earnings downtrend, strong capital returns including the 4% dividend yield and the catalysts of a rebounding premium smartphone market in FY17 along with the IoT growth opportunities makes Qualcomm a buy around $50.

Disclosure: I am/we are long QCOM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.