Lehman Brother's analysis from last week.
lehman.com
Headline: QUALCOMM: Upbeat Meeting With Mgmt, Expect Strong Trends for 3Q99 & Beyond
Author: Tim Luke (212)526-4993
Rating: 1
Company: QCOM
Country: COM CUS
Industry: TELECM
Ticker : QCOM Rank(Old): 1-Buy Rank(New): 1-Buy
Price : $98 7/8 52wk Range: $120-19 Price Target (Old):$150
Today's Date : 06/03/99 Price Target (New):$150
Fiscal Year : SEP
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EPS 1998 1999 2000 2001
QTR. Actual Old New Old New Old New
1st: 0.29A 0.33A 0.33A - -E - -E - -E - -E
2nd: 0.13A 0.41A 0.41A - -E - -E - -E - -E
3rd: 0.17A 0.65E 0.65E - -E - -E - -E - -E
4th: 0.27A 0.72E 0.72E - -E - -E - -E - -E
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Year:$ 0.85A $ 2.11E $ 2.11E $ 2.78E $ 2.78E $ - -E $ - -E
Street Est.: $ 2.01E $ 2.01E $ 2.70E $ 2.70E $ 3.60E $ 3.60E
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Price (As of 6/1): $93 15/16 Revenue (1999): 3.6 Bil.
Return On Equity (99): 25% Proj. 5yr EPS Grth: 35.0 %
Shares Outstanding: 148.0 Mil. Dividend Yield: N/A
Mkt Capitalization: 13.90 Bil. P/E 1999; 2000 : 46.9 X; 35.5 X
Current Book Value: $6.86 /sh Convertible: YES
Debt-to-Capital: 99.8 % Disclosure(s): C, A
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* Last night, we hosted a dinner with QCOM's CFO Tony Thornley. Discussions
with management appear to confirm our checks indicating QCOM is continuing to
see excellent business trends in current 3Q99 with the outlook strengthening
looking into 4Q99 & FY00. Strength across all 3 core areas of chips,
handsets & royalties lead us to believe our high end estimates remain
conservative.
* Management highlighted demand for CDMA chipsets has remained robust as
subscriber growth has accelerated around the world notably in US, Japan
(already over 1 million subs) & Brazil. Our estimate for global CDMA subs
jumping from 23 mill in 1998 to over 50 mill in 1999 looks on track.
* Chipset order visibility from Korean manufacturers such as Samsung &
Hyundai remains good despite slower domestic sub growth during April (after
handset subsidy rule change). Shipments expected to see buoyant QoQ growth
over balance of FY99. Our 3Q99 ASIC est of $260 mill may be exceeded.
* Handset division continues to exceed our expectations with strong order
flow. Capacity now set to increase to over 1 million units per month by Sept
99. Phone margins may exceed our ests (21.5% gross margins in 3Q99)
benefiting from ramp of lower cost Thin Phone which may now reach over 20% of
total shipments in 3Q99 (Vs our est 15%)
* With royalty revenues likely to exceed our ests of $80 mill in 3Q99 & $89
mill in 4Q99 AND Contract Services to Globalstar now expected to rise QoQ Vs
our est of modest decline, consider our EPS ests for 3Q99 & FY99 may prove
conservative. QCOM is poised to benefit from rapid expansion of global CDMA
market & we are reiterating both our Buy rating & our price target of $150 or
40x our initial CY01 estimate of $3.75
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Stock Opinion; Reiterate 1 Buy Rating, Target $150
With QCOM'shares off more than 17% from their recent highs we are taking this
opportunity to reiterate our 1 But rating. Our discussions with management
last night appear to confirm our view that the company is benefiting from
strong demand trends across all 3 core businesses as CDMA growth accelerates
around the world.
We continue to believe our earnings estimates may be revised steadily upwards
over the balance of 1999. In 3Q99, we believe that our estimates for chipset
sales at $260 million vs $230 million in 2Q99 may prove conservative as QCOM
benefits from ramping shipments of the new MSN3000 chipset. Royalty revenues
may be another area of possible area of upside. We have modeled $80 million
in 3Q99 royalty revenues up modestly from $77 million and we consider this
revenues line could reach as high as $85 million in 3Q99. We also maintain
that substantial improvements in QCOM's operating costs in the handset area
may lead to margins improving at a faster rate than we have modeled.
Based on this robust outlook, with CDMA hitting its stride and visibility
improving on 3Q99 and the balance of FY99, we have recently raised our
estimates for Qualcomm. Our earnings estimates for FY99 and FY00 are $2.11
and $2.77 respectively. Our revenue estimates (ex-royalties) are $3.6
billion in FY99 and around $3.9 billion in FY00. We are currently looking
for royalty revenues to increase from $214 million in FY98 to around $290
million in FY99 and as high as $370 million in FY00. With Qualcomm's gross
and operating margins likely to provide considerable leverage, we believe
these estimates may prove conservative. We are currently modeling that
Qualcomm's operating margins should move from 3.7% in 2Q99 to around 12.8% by
the end of FY99. We anticipate further upward revisions to our estimates
during FY99.
Looking forward, we remain encouraged by the strong growth prospects for both
Qualcomm and the global CDMA market. In the US, we believe the highly
successful one-rate plans offered by many major carriers such as Sprint are
likely to continue to drive rapid CDMA subscriber growth. Overseas, the
removal of uncertainty of standards should help several large new markets
such as Japan, Brazil, India and China gain momentum in 1999. Following the
conclusion of the landmark settlement between Ericsson and Qualcomm and we
believe Qualcomm will benefit from increased royalty revenues as the existing
CDMA market expands (following Ericsson's endorsement of that market) and as
a converged global third generation wireless standard based on CDMA begins to
be deployed.
We continue to view QUALCOMM as a highly attractive investment vehicle in the
wireless equipment sector. Our 1 Buy rating and our twelve month current
price target of $150 is based on Qualcomm achieving a multiple of around 35-
40x our new high end calendar 2001 estimate range of $3.60 to $3.75.
BUSINESS DESCRIPTION: QUALCOMM provides advanced communications systems &
products based on digital wireless technology. These include the OmniTRACS
sys. & digital wireless telephone sys. based on CDMA technology.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities.
This document is for information purposes only. We do not represent that this
information is complete or accurate. All opinions are subject to change. The
securities mentioned may not be eligible for sale in some states or
countries. This document has been prepared by Lehman Brothers Inc., Members
SIPC, on behalf of Lehman Brothers International (Europe), which is regulated
by the SFA. ]
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