Qualcomm Poised for a Strong 2014

 | Feb 01, 2014 | 6:00 PM EST
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Over the past six months, we have recommended investing in Qualcomm (QCOM) a number of times. The company is leading the revolution toward an interconnected wireless world, and it dominates in 3G and 4G wireless patents and chipset technologies. 

On Wednesday, Jan. 29, Qualcomm reported solid results: $6.6 billion in revenue and $1.26 in earnings per share. Revenue was slightly shy of the estimates but was up a healthy 10% on a year-over-year basis. Some analysts and investors were concerned that slower smartphone sales at Apple(AAPL) and Samsung would weigh on Qualcomm's results.

This was not the case. Apple and Samsung's releases revealed that their businesses are too concentrated in the higher-end developed-market economies. Qualcomm demonstrated that it is making the transition toward more emerging-market smartphone sales. Qualcomm has shifted its customer base to the new smartphone growth providers such as Lenovo and Huawei in China and LG Electronics in South Korea.

Qualcomm's earnings of $1.26 a share also surprised investors. This is up 19% on a year-over-year basis and well ahead of consensus expectations of $1.18. Even if one were to exclude a $0.04 gain from special items, earnings were still $0.04 ahead of the estimates and grew at a double-digit rate on a year-over-year basis.

Management gave very good guidance for the upcoming year and expects revenue to rise 10%. The earnings improvement should be even greater, coming in at an 11% to 15% increase.

Management also reiterated its intention to return over 70% of earnings and free cash flow to investors in the upcoming years through dividends and share buybacks. The company ended the quarter with over $30 billion in net cash, or over $17 per share.

We like Qualcomm shares at these levels and once again recommend owning the company as a core technology holding. The business should grow at double-digit rates for the next three to five years on a secular shift to more global wireless connectivity through smartphones, tablets and other various Internet-connected devices such as those in autos, healthcare devices and the emerging wearable technologies.

At a recent price of $72.50, we believe Qualcomm's shares are still reasonably priced. The stock has historically traded at 15x to 20x EPS. At the recent price, the shares are at the low end of their historical valuation band. The company also pays a good dividend of $1.40, resulting in a solid 1.90% dividend yield. Over time, there is much room for the dividend to grow with the large free cash flow and net cash balances. The low valuation, stellar balance sheet and improving dividend yield should provide meaningful upside from the current share price.

We like Qualcomm and believe it is a good choice for investors who are looking for a very stable business franchise with a lot of growth.  

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