Alex Cena just raised the price target to $600>
QCOM: Kyocera Deal Positive For Fianancials; Price Target Raised
Qualcomm Inc(QCOM)*
Rating: 1H
Salomon Smith Barney ~ December 23, 1999
12/23/99 QUALCOMM, Inc. (QCOM $485.43,1-H,Tgt $600.00) Alex M. Cena
--SUMMARY:--QUALCOMM, Inc.--Telecommunications Equipment
* We continue to recommend QCOM with a 1H rating
* Last night QCOM announced the sale of its handset division to Kyocera
* Kyocera will purchase the majority (at least 70%) of its ASIC and
software needs from QCOM over the next five years
* A big plus for QCOM since Kyocera was one of the few Japanese co's that
was not using QCOM's ASICs. I.e. Kyocera becomes a new ASIC customer
* Kyocera has a strong presence in Japan, Korea and China. All three mkts
are and will continue to be the fastest growing CDMA markets in the world
* Transaction is accretive by as much as $0.90 on an annual basis
* We will formally change EPS ests upon completition of deal in Feb
* Based on other co's w/enabling technologies, we believe QCOM should trade
between 20-30x fwd revs, which would represent a 12 month target of $600
12/23/99 QUALCOMM, Inc. (QCOM $485.43,1-H,Tgt $600.00) Alex M. Cena
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 09/99 EPS $0.30A $0.41A $0.75A $0.91A $2.47A
Previous 09/00 EPS $N/A $N/A $N/A $N/A $4.00E
Current 09/00 EPS $N/A $N/A $N/A $N/A $4.00E
Previous 09/01 EPS $N/A $N/A $N/A $N/A $5.30E
Current 09/01 EPS $N/A $N/A $N/A $N/A $5.30E
Previous 09/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 09/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
12/23/99 QUALCOMM, Inc. (QCOM $485.43,1-H,Tgt $600.00) Alex M. Cena
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:No Change Price (12/22/99)....:$485.43
P/E Ratio 09/00.....:121.4x Target Price..:$600.00 Prior:370.00
P/E Ratio 09/01.....:91.6x Proj.5yr EPS Grth...:44.4%
Return on Eqty 99...:48.9% Book Value/Shr(00)..:9.90
LT Debt-to-Capital(a)0.2% Dividend............:$N/A
Revenue (00)........:4163.00mil Yield...............:N/A%
Shares Outstanding..:159.0mil Convertible.........:No
Mkt. Capitalization.:77183.4mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
12/23/99 QUALCOMM, Inc. (QCOM $485.43,1-H,Tgt $600.00)
--OPINION:------------------------------------------------------------------
Last night Qualcomm announced the sale of its handset division to
Kyocera. Although this deal may initially be viewed as negative by the
Street because current perception was the sale would be to a top tier
manufacturer (i.e. Nokia or Motorola), we believe the deal with Kyocera
is an excellent one, especially from a financial standpoint. We believe
this deal is a positive for Qualcomm because it allows Qualcomm to
maintain control over its CDMA engineers (they will remain Qualcomm
employees and be be contracted out to Kyocera) as well as provide
substantial financial benefits. Under the terms of the deal Kyocera has
agreed to purchase at least 70% of its ASICs needs from Qualcomm over the
next five years as well as keep its royalty rate at its current level,
which is one of the highest in the industry.
We believe this deal will be accretive to Qualcomm's earnings by at least
$0.90 per year. Although we will wait until the completion of the
transaction, currently scheduled for the end of February, to officially
change our estimates, we walk through how we arrived at $0.90 of
incremental EPS. The transaction should be accretive to earnings due to
(1) increased ASICs sales; (2) the elimination of losses from the handset
division; (3) increased royalty revenues; and, (4) incremental interest
income from the purchase price.
INCREASED ASICS REVENUES
Kyocera currently does not buy its ASICs chips from Qualcomm. As part of
the transaction Kyocera agreed to buy at least 70% of its ASICs needs
from Qualcomm over the next five years. Based on Kyocera's assumptions
for the amount of CDMA it can manufacture and on the current average
selling price of Qualcomm's ASIC, we believe this would add $320 million
(on an annual basis) of ASIC revenues. Based on our current estimates,
this would equate to $128 million in pretax earnings or $0.42 per share.
ELIMINATION OF LOSSES
We currently estimate that Qualcomm is losing $60 million per year from
its handset division. Upon completion of the sale of this division these
losses would be eliminated, which equates to an incremental $0.20 per
share in EPS.
INCREASED ROYALTIES
Kyocera will maintain its current royalty agreement with Qualcomm, which
is one of the highest in the industry. We estimate there will be an
incremental $75 million in royalty revenues, which is based on Qualcomm's
current handset production volume, being transferred to Kyocera, at
Kyocera's royalty rate. This equates to $68 million in pretax earnings
or $0.22 per share.
INCREMENTAL INTEREST INCOME
As part of the transaction Qualcomm will receive "several hundred
million" dollars in cash. Based on our estimate for Qualcomm's earnings
on its cash balance and the transaction price, we believe this will
provide an additional $0.07 per share in earnings.
ASSUMPTIONS FOR INCREMENTAL EPS REASONABLE, IF NOT CONSERVATIVE
Suming these together we arrive at incremental EPS, on a 12 month basis,
of at least $0.90. We point out that our assumptions, detailed above,
are fairly conservative. For example, our estimate for the amount of
CDMA phones Kyocera can manufacture per year assumes Qualcomm's current
production for handsets as well as Kyocera's current manufacturing run
rate. It does not account for any potential growth. We beleive this
number can easily double over the next two to three years. Also, Kyocera
has a strong presence in Japan, Korea and China, which are and will
continue to be the fastest growing CDMA markets. In other words, we
believe Kyocera is well positioned to gain a significant amount of market
share in these three important CDMA markets.
WE BELEIVE QUALCOMM SHARES CAN TRADE AT $600 WITHIN 12 MONTHS
Given the company's announcement of the sale of its handset division we
believe this will impact the metrics used to value Qualcomm. With the
sale of the handset division, Qualcomm will become a company with an
enabling communications technology that is not only for the fastest
growing digital wireless standard but also for 3G wireless networks,
which is necessary to optimize the wireless networks for high-speed data
access. Other enabling technology companies, such as xDSL, currently
trade between 20-30 times forward revenues. We believe Qualcomm deserves
to trade within this range based on 1) CDMA is the fastest growing
wireless technology; 2) CDMA has a 15% market share today, which we
believe will grow to approximately 100% within the next 10 years as 3G
networks are deployed around the world; and, 3) we believe wireless has a
greater unit demand and ASP potetnial than DSL modems. For example, we
feel it is difficult to imagine there will be more than one DSL line to
each home and it must share the market with cable modems whereas it is,
in our opinion, very possible to have multiple wireless devices per
home.
As people begin to focus on 2001 revenues and earnings we believe
Qualcomm shares can trade at $600 within the next 12 months based on our
view Qualcomm deserves a valuation of at least 20-30 times forward
revenues. Pro forma the sale of its handset division, we believe
Qualcomm will generate $4.6 billion in revenues in fiscal 2001.
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