Qualcomm Looks Beyond Phones For Recovery

  • Qualcomm has a new joint venture with TDK in Singapore
  • The intent is to build complete radios for drones and robots, as well as cell phone makers
  • Qualcomm remains a dividend powerhouse, despite a weakened balance sheet.

Qualcomm (NASDAQ:QCOM) had a very rough 2015. The maker and designer of radio chips for phones has seen the value of its stock fall by more than one-third in the last year, even though Qualcomm hiked the quarterly dividend from 42 cents to 48 cents per share. That gives Qualcomm stock a yield of 4.13% at current prices. Last year Qualcomm stock had come under heavy pressure after anti-trust regulators had started investigations against the company.

The problem is that Qualcomm's revenue growth has turned negative. Revenue came in at $5.46 billion for the quarter ending in September, compared to $5.83 billion for the June quarter, $6.89 billion for the March quarter and $7.1 billion in the previous December quarter. Qualcomm's operating income fell nearly in half, from $2 billion to $1.12 billion. The dividend is still affordable, but 42 cents on $1.17 in earnings is not nearly as good as 48 cents on 68 cents in earnings.
QCOM revenue chart

Source: Qualcomm Revenue Data by amigobulls.com

To compensate for the poor income statement Qualcomm added debt to the balance sheet. Long-term debt went from zero to nearly $10 billion during the year, and the money was used to repurchase stock.  But Qualcomm Stock price fell anyway.
QCOM stock chart

Source: Qualcomm Stock Price Data by amigobulls.com

To re-start the growth engine Qualcomm announced this week that it is teaming up with TDK of Japan on a Singapore plant that will make radio chips for drones, cars and robots as well as phones. The new venture, RF360, will cost Qualcomm $1.2 billion and take TDK’s design assets, and Qualcomm can buy out TDK’s 49% interest in the $3 billion venture. 

Qualcomm will be able to offer chip sets that have everything needed for radio communications, not just the radio chip. Controlling signals through the antenna, it is hoped, will work out better for phone makers than the current system of buying discrete components, while equipment makers will handle all their data communication needs, which after all represent just a component of larger robotic systems, as a single unit.

This is the biggest risk yet taken by CEO Steve Mollenkopf, 46, who took Qualcomm's command nearly two years ago and last year got $58 million in restricted stock awards along with $2.7 million in compensation. He took over from Paul Jacobs , son of founder Irwin Jacobs, who remained as executive chairman and has a similar compensation package.

TDK got a 5% boost from its local stock market on the deal, but Qualcomm stock is up only 1.5%, despite having the controlling share and the buy-out option. Most analysts have Qualcomm rated as a buy  but they had it rated as a buy a year ago, too. Qualcomm reports earnings on January 27 and while the average estimate is for 90 cents/share in earnings on $5.63 billion in revenue (a slight gain in revenue but lighter earnings than last quarter) there is a “whisper number” that earnings could be as high as 96 cents.

Given the choppy economic seas Qualcomm is investing into, my guess is that you will be able to catch it below the current price of $46.50. Qualcomm stock right now is for defensive, dividend-oriented investors only, but if the TDK venture pays off the company’s glory days could return.

Dana Blankenhorn Dana Blankenhorn   on Amigobulls :
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