Qualcomm Looks Like a Timely Investment

 | Aug 02, 2013 | 10:00 AM EDT
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One stock that has recently caught our attention is Qualcomm (QCOM). As value investors, we are intrigued by the combination of a depressed valuation and the fact that Qualcomm's shares have been relatively flat over the past year, compared with a 25% rise in the S&P 500 index.

Both factors likely reflect investor concerns of a slowing high-end smartphone market dominated by the Apple (AAPL) iPhone and Samsung Galaxy lines. Furthermore, we believe that investors are also getting worried that incremental sales growth from the emerging markets will occur at price points much below growth in developed markets, thereby diluting the growth rate even more.

We believe there is much more to the Qualcomm story than these concerns. For one thing, smartphone adoption is projected to grow to 1.7 billion units, compared with 1 billion units supplied in 2013. In addition, emerging-market smartphones are seeing an uptick in the required complexity for the devices. In the recent quarter, licensing income was $6 per license higher than expected, on a rise in the mix from emerging-market phone producers.

Furthermore, many analysts believe that we have yet to tap the potential of wireless devices. We should expect to see rising levels of wireless adoption in automobiles, medical devices, industrial machinery and portable computing devices such as laptops and smartphones. Such a prospect could be enormously beneficial to Qualcomm. Overall, the industry still has many years of healthy growth, despite the recent concerns about a slowdown.

In our view, Qualcomm should be the ultimate winner of the growing wireless revolution, led by its industry-leading 3G CDMA and 4G LTE patent portfolios. The company controls the essential patents and generates almost $8 billion per year (and growing) in licensing income from these innovations. In addition, Qualcomm supplies industry-leading chipsets, led by its Snapdragon brand of processors, to round out its industry dominance. The company has the broad technology and product portfolio to fully participate in the continued wireless revolution.

Over the past five years, sales have more than doubled to $24 billion. Earnings per share also more than doubled during the time frame from pure organic growth. Going forward, growth will be more tempered but should still be at 10%-plus rates.

Management recently adopted a more pro-shareholder-friendly attitude, opting to return more cash to shareholders. In March, the company boosted the dividend by 40% to a respectable 2.2% dividend level. The firm also enacted a new $5 billion share-repurchase plan. Investors should expect to see future dividend rate increases, since Qualcomm has more than $30 billion in net cash per share, close to 30% of the company's market capitalization.

At its recent price of $64.90, Qualcomm's stock is trading at 14.1x 2013's EPS estimate of $4.60 and 13x 2014's EPS estimate of $5.00. The shares have historically traded at 20x earnings because of the company's high level of earnings consistency and growth. We fully expect these positive fundamentals to continue well into 2014 and 2015. Finally, the company provides a below-market beta ratio of .80.

In today's market, Qualcomm makes a timely addition to any portfolio. The company should provide investors with a proper balance of both growth and stability in the upcoming years, as well as a great opportunity to profit from the ongoing and evolving global wireless adoption, an adoption that should unfold for several years to come.

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