My nominee for scumbag analyst of the month is
Todd Berner of Morningstar who, on 10/2, just happened to release his ill reasoned report cutting up QCOM just before various hedge funds sold the hell out of it. Do you believe in coincidences?
"""A weak June quarter supports what we've been saying all along about Qualcomm: A company
without growth isn't worth 45 times forward earnings.
Qualcomm's fiscal third quarter was a big disappointment. The top line declined 10% from the
second quarter, mainly because of a 26% drop in royalties and a decrease in business with troubled
Globalstar GSTRF. To compound matters, management took its eye off the ball in terms of
expenses; ignoring the pro-forma accounting that Qualcomm uses, operating expenses--especially
research and development and selling, general, and administrative spending--grew 6 percentage
points from the March period. Even on a pro-forma basis, profit margins fell substantially.
Still, the company topped consensus estimates on a pro-forma basis, delivering EPS of $0.22
compared with the First Call estimate of $0.21. To get there, however, Qualcomm needed to
exclude aftertax adjustments of $449 million. It fatigues us that Qualcomm depends so heavily on
pro-forma accounting--a Pandora's box if there ever was one--to make its numbers; if enough
"special" charges are excluded from the calculation, nearly any EPS figure is possible. This
quarter's main charge was a write-down of an investment in a Brazilian company. The prevalence
of these charges suggests one of two things: Management has mastered the art of spin-doctoring or
it is consistent at making lousy investments that later need to be written off.
Also, although Qualcomm still has an excellent balance sheet, with $2.3 billion in cash and no debt,
a couple of things occurred in the quarter that raised an eyebrow. Even excluding finance
receivables, which jumped $120 million, or 18%, from the March quarter, days' sales outstanding
(a measure of the speed at which customers pay) ticked up 9 in the period, to 78. Higher DSO,
combined with a higher inventory balance at quarter-end, suggests that Qualcomm may have sold
some extra chips very near the end of June; this would explain management's forecast for fewer
than 14 million chips to be shipped in the September quarter--with a stuffed channel, there is no
point in shipping additional units.
Accounting can't hide the fact that things aren't great right now: Sales are projected to grow just
10% sequentially; estimates for the number of CDMA phones sold worldwide in 2001 continue to
decline; fewer chipsets will be shipped this quarter; EPS will not grow from 2000's level; and
next-generation technologies are being delayed. Given all of this, we fail to see why investors
would incur the price risk of paying 45 times forward earnings for Qualcomm shares, which
remain well above our fair value target.
Here's is the reply when I emailed him:
Joe, as I've said many times, Nokia pays royalties to QCOM. That is
clear. But they do not use QCOM's chips -- my point is that Nokia could
take business away from QCOM's chip segment. That's all.
Todd
Todd.Bernier@morningstar.com "" |
