Is Qualcomm, Inc. Stock A Smart Long Term Investment?

  • Qualcomm Inc., delivered better than expected third quarter results that beat expectations by a significant margin.
  • Investors can be encouraged by the fact that Qualcomm's financial performance in China is improving.
  • QCOM offered a promising outlook for the current quarter.

On July 21, after market close, Qualcomm (NSDQ:QCOM) reported good results for its Q3 fiscal 2016 and offered a promising outlook for the current quarter. As a result, Qualcomm shares soared 7% in after-hours trading.

Qualcomm Inc.'s adjusted earnings-per-share of $1.16 beat expectations by a significant margin of $0.18 (18.4%). Revenue for the quarter was $6.04 billion, above Wall Street's estimates of $5.55 million, and above last year revenue of $5.83 billion. The company beat earnings-per-share estimates in all its last six quarters, as shown in the table below.

Source: Yahoo Finance

Source: FY 2016 3rd Quarter Earnings Release

In the report, CEO Steve Mollenkopf said:

"We delivered strong results this quarter, with EPS well ahead of our guidance based on meaningful progress with licensees in China. Our chipset business is also benefiting from a strong new product ramp across tiers, particularly with fast growing OEMs in China. We are executing well on our strategic priorities, and we remain confident that our focused investments in 5G and other advanced technologies will create a strong foundation for long-term earnings growth.”

Qualcomm successfully topped estimates because it shipped 16 million more chips than it had guided. What's more, in my opinion, it is very encouraging that the company reported higher Qualcomm Technology Licensing (QTL) revenue, up 5.5% year-over-year, with more than $200 million in catch-up payments from recently licensed Chinese OEMs. Hence, we can expect that this trend will continue with more Chinese OEMs paying royalties.

Source: company's reports

Investors can also be encouraged by the fact that Qualcomm's financial performance in China is improving. According to the company, in Qualcomm CDMA Technologies (QCT), it sees favorable demand trends for its new chipsets across the mid-end and high-end smartphone tiers, in particular with the top ten vendors in China. The company also said that it sees incremental demand for its lower tier chipsets in China versus its prior expectations, driven in part by its differentiated All Mode and modem leadership. According to Qualcomm, in the premium tier, its Snapdragon 820 now has more than 150 premium smartphone and tablet designs.

The company has been making efforts to reduce cost, and according to Qualcomm, it is on track to achieve $1.4 billion spending reductions. What's more, according to the company, it is on track to realize at least $700 million in savings in the current fiscal year, an increase of $100 million from its original estimate.

Outlook

In its third-quarter report, the company offered guidance for the current quarter which was better than analysts' expectations. Qualcomm expects revenue of $5.4-$6.2 billion in the quarter and adjusted earnings-per-share of $1.05-$1.15, about 21% increase from the same quarter a year ago.

Source: FY 2016 3rd Quarter Earnings Release

Dividend and Share Repurchase

Qualcomm generates strong cash flow and returns substantial capital to its shareholders through stock buybacks and increasing dividend payments. During the third quarter of fiscal 2016, the company returned $881 million to its stockholders, including $781 million, or $0.53 per share, of cash dividends paid and $100 million through repurchases of 1.8 million shares of common stock.

The current annual dividend yield is pretty high at 3.80%, and the payout ratio is at 60.8%. The current yield is historically high, which indicates that the stock is undervalued, according to some dividend assessment theories. The annual rate of dividend growth over the past three years was very high at 24.6%, over the past five years was also very high at 20.1%, and over the last ten years was high at 18.9%.

Source: company’s reports  *assuming same dividend rate for the year

Valuation

Since the beginning of the year, QCOM's stock is already up 20.1% while the S&P 500 Index has increased 6.0%, and the Nasdaq Composite Index has gained 1.4%. However, since the beginning of 2012, QCOM's stock has gained only 9.8%. In this period, the S&P 500 Index has increased 72.3%, and the Nasdaq Composite Index has risen 94.9%.

QCOM Daily Chart

Chart: TradeStation Group, Inc.

Qualcomm's valuation metrics are very good, the trailing P/E is at 17.63, and the forward P/E is very low at 12.07. The price to cash flow is at 13.35, and the current ratio is very high at 2.90. Furthermore, its Enterprise Value/EBITDA ratio is low at 9.37, and its PEG ratio is also low at 1.20.

In addition, most of 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.

Source: Portfolio123

Conclusion

Qualcomm delivered better than expected third quarter results that beat expectations by a significant margin, and offered a promising outlook for the current quarter. Investors can also be encouraged by the fact that Qualcomm's financial performance in China is improving since China is an essential market for the company. Qualcomm's valuation is very good, the forward P/E is very low at 12.07, and its PEG ratio is also low at 1.20. Moreover, the company generates strong cash flow and returns substantial capital to its shareholders through stock buyback and increasing dividend payments, currently yielding 3.80%. In my view, Qualcomm stock is a smart long-term investment.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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