From SSB,
OPINION
On September 28, we lowered our 2002 worldwide handset unit forecast to 451
million from 493 million, due to the potential for greater macro economic
weakness as well as a deteriorating industry outlook and a heavy reliance on
replacement sales. After further breakdown adjustments by technology we are
lowering our CDMA handset unit estimates for 2002 and 2003 to 79.6 million
and 102.0 million, respectively, from our prior estimates of 99 million and
122 million, respectively.
We are reducing our estimates for FY02 and FY03 to reflect these changes to
our global CDMA outlook. Our new revenue estimates for FY02 and FY03 are
$3.11 billion and $3.56 billion, respectively, vs our prior estimates of
$3.35 billion and $4.1 billion, respectively. Our EPS estimates for FY02 and
FY03 have been reduced to $1.15 and $1.37, respectively, from our prior
estimates of $1.30 and $1.65, respectively.
VALUATION ATTRACTIVE COMPARED TO HISTORICAL LEVELS
The toughest hurdle the stock faces other than its volatility is attempting
to place a valuation on the stock. We have looked at QUALCOMM several
different ways, including trailing P/E multiples, forward P/E multiples
relative to the S&P500 and we have even done a sum of the parts analysis that
includes a DCF for the royalty stream.
Based on these various valuation methods we get a price for QUALCOMM that
ranges from $66 to $78, but have established an official target of $70, down
from $75 previously.
Since September of 1994 the average trailing P/E multiple for QUALCOMM,
excluding the hyper-trading period of Nov 99-April 00, is 67.8x (it is 73.3x
if those periods are included). Based on roughly 65x trailing earnings we
arrive at a 12 month price target of $67.
Over the same time period on a relative forward P/E mulitple basis QUALCOMM,
excluding Nov 99 - April 00, has traded at an average of 2.2x (the multiple
is 2.3x including those periods). With a market multiple of roughly 24x 2002
estimates and our $1.25 estimate for CY02 earnings, we arrive at 12 month
price target of $66.
When valuing QUALCOMM on a "sum of the parts" using a DCF valuation for the
royalty business and a revenue multiple for the chip business we arrive at a
12 month price target of $78. Our 10-year DCF, using a 12% discount rate and
a 20 multiple (discount to the market multiple) for year 10 cash flows,
values the company's royalty business at $60.50. Based on a multiple of 2002
revenues for the average Comm IC company of 7.9x, we arrive at a $17.50 value
for the company's ASIC business.
Our revised $70 price target (our prior target was $75) is the average of
these three different valuation techniques.
STOCK IS ATTRACTIVE BOTH IN NEAR-TERM AND FOR LONG-TERM
We continue to believe QUALCOMM is the best positioned company to benefit
from the migration to next-generation wireless technologies, which are all
based on its CDMA technology. We believe the stock at current levels is
attractive for both the long-term and the intermediate-term based on its
strong 3G position and the migration to 1XRTT over the next 2 years.
Obviously the most poweful catalyst for the stock over the long-term is the
migration to 3G technologies, which are all based on QUALCOMM's CDMA
technology. Simply stated, in the 3G environment QUALCOMM is positioned to
receive a portion of every capital dollar spent on 3G wireless technologies
from handsets to base stations, which compares to its current position of
receiving a piece of only 15% the current wireless market (current CDMA
portion of the wireless equipment market).
In the near- to medium-term we believe the key driver for QUALCOMM is the
migration within the CDMA market to 1XRTT. We expect S. Korea, the first
market to launch commercial 1X service, to continue to post solid 1X growth
over the next several quarters. In fact, if S. Korea were to keep its net
addition run rate from the September month for the remainder of the year (we
believe this is achieveable) it would end the year with over 3 million 1X
subscribers, which is well ahead of our 2 million subscriber estimate.
We also expect the take-up of 1X in other markets (U.S., Mexico, Brazil, New
Zealand and Japan) could mirror S. Korea as we expect many operators to
initially push 1X to their customers more for a cost-effective voice upgrade
than a data solution. This is evidenced by Sprint PCS (PCS, 1H, $27.63,
covered by Mike Rollins), which plans to begin ordering and selling 1X phones
to its customers this quarter in an effort to improve its voice capacity once
it launches its 1X network in mid-2002.
We believe the take-up of 1XRTT not only as a data solution but also a cost-
effective voice capacity solution over the next 12 months as well as the
company's position in 3G will continue to drive the stock for the next 2-3
years. We expect investor focus to return to these catalysts post-conference
call after the near-term uncertainty and confusion over company earnings
guidance has past.
We reiterate our 1H (Buy, High risk) rating and believe current levels
represent a good entry point for the stock.
SEPTEMBER QUARTER EARNINGS PREVIEW - FOCUS ON DECEMBER QUARTER & FY02 GUIDANCE
QUALCOMM will resport its F4Q01 (September) results on November 6th, after
the close. We do not expect any major surprises concerning the September
quarter and we expect all eyes to be focused on the company's December
quarter guidance, its FY02 guidance and its outlook for the CDMA market in
2002. We will make any further adjustments to our worldwide CDMA and
QUALCOMM specific estimates if necessary.
For the September quarter we estimate revenues of $702.5 million, an increase
of 11% from last year. We believe EPS will be in-line with our consensus
estimate of $0.25. For its ASICs division, we estimate F4Q01 revenues will
increase 21% to $324.6 million on MSM chip shipments of 13.5 million. We
estimate the pretax margin for the ASIC division to be 20.0%. We estimate
license and royalty revenues of $246.2 million, an increase of 32% YOY with a
pretax margin of 90.0%. We expect QWS division revenues to be $100.7
million, a 33% YOY decline, with a pretax margin of 18%. |
