Peter, The only shareholder wealth that QCOM has available to consume is paid in capital, and since the value of the company is greater than paid in capital, technically it hasn't been consumed
Not true. IMHO.
There is a very subtle thing going on with our tech superstars. Not just Qualcomm (although it is a somewhat spectacular example).
The way I see things, it has to do with the "off balance sheet" elements of equity financing, where certain very real costs just never appear because there is a related income to offset them. Which is not illegal, but most people haven't got a foggy clue what is happening.
In analogy, it would be like recording earnings while omitting revenue and all that cost stuff in between. After all, isn't it just the earnings that matter?
So far I've only addressed the balance sheet view of profitability. When I look at the total economic profits including the stuff that never made it to the balance sheet, the picture goes from bad to plain ugly. Certain transactions only seem to make a partial appearance on the books.
Maybe shareholders are just supposed to know what's going on, and all the necessary data is available in the various SEC reports to figure things out. And it has nothing to do with orthogonal spread spectrum radio bit transport protocols either.
The accountants will stand up and say it is perfectly legal. I think they are right. The reasoning is that the costs are accounted as though transactions occur at arms length. Which point of view, if adopted, makes the treatment legitimate.
However, first try to convince me that employee stock options are not part of the pay package, and then we can discuss whether the benefit is intended or incidental. Perhaps the monetizing transaction occurs at arms length, but the arrangement is one of intended benefit to both parties through the "arms-length" arrangement as though it doesn't exist. Which, by the way, is the hue and cry on the senate floor over at Enron.
So from an economic perspective, it looks to me like there are costs which are being paid that don't appear on the books. If they are necessary costs, then the cost of doing business is being under-stated. If they are unnecessary costs, then the management team needs better governance. We're talking an incredible amount of shareholder wealth here.
Can I quantify what I'm talking about? Yes. I can be very specific.
Between October 1, 1999 and September 30, 2000 (FY 00) Qualcomm issued 102,288 million shares. During a period when the average daily closing price per share was $94.87
Between October 1, 2000 and September 30, 2001 (FY 01) Qualcomm issued another 15,638 million shares. Average price $66.67
None of these figures includes the secondary offering that was placed in FY '99.
A quick scribble with a pencil shows a fair market value of these printed certificates of $10,656 Millions. Yet they recorded only $3,112 Millions in Paid In Capital. The other $7,544 Millions never appeared on the balance sheet by a trick of the accountant's pencil. It just vanished because it left the company as soon as it was received.
Instead of recording:
Issue shares $ 10,656
Pay for service received (7,544)
========
Retain Paid In Capital $ 3,112
Current accounting allows us to record the transaction as
Issue Shares to Paid In Capital $ 3,112
and it's kind of implicit that some service was received
Somebody got value worth 7.5 Billions more than the consideration paid. The company (shareholders) parted with 7.5 Billions more than the consideration received. This is very real economic activity. And none of it shows up on the books.
In the case of Qualcomm, it would seem to me that it cost the company (and therefore its shareholders) at least 7.5 Billion dollars more to do what it has done than appears on its books!!
Either that 7.5 Billion cost was a necessary cost of doing business and therefore the balance sheet is understating the ongoing economic profitability, or it was waste of shareholder capital. Or both to some degree. Either way, the loss occurs as a consequence of decisions and actions and economic activity undertaken by the company on behalf of shareholders.
Shareholders have contributed not 4.8 Billions, but actually more than 12.3 Billions. And currently enjoy 5.1 Billions in equity (generously valuing Goodwill at a hundred pennies on the dollar).
Thus, over its lifetime Qualcomm has consumed 7.2 Billions for a net return of negative 59% on 12 Billions in shareholder equity.
Some might jump in here to say that this was the effect of the bubble. Well, yes, and no. Although certainly one effect of declining stock price is to make equity financing less effective.
Even post bubble now that the company is *more profitable* there is still an impact. So I took a look at the most recent quarter. Unfortunately, exact share numbers are not published in the 10-Q filings so I can't be exact. However, by examining the 10-K and the 10-Q and other public sources here's the best I could get:
Exact #shares Sept 30 2001 763,289,---
Exact #shares Nov 2 2001 764,419,066
Weighted Average Shares During 1Q '02 764,959,---
Exact #shares Jan 22 2002 767,160,441
Approx #shares at end Dec 30 2001 765,549,---
Approx #shares issued During 1Q '02 2,260,---
(extrapolated)
Average share price During 1Q '02 @ $53.14
(daily close, YHOO)
Approximate Consideration $ 119,780
minus Paid In Capital (from 10Q) (70,517)
---------
"Off Balance Sheet" employee benefit $ 49,263
paid by shareholders
Reported Earnings $ 139,233
Net of employee benefit (49,263)
----------
Effective Earnings $ 89,970
Effective EPS $ 0.11
Effective PE ratio @ $30/sh 68
Effective yield @ $30/sh 1.5 %
Which brings me back to the first post that drew me back from my lurk. The economic value it is currently creating does not justify its current share price. Period.
Which does not mean that the future value might or might not be rosy. The company plainly has to be valued based on future potential. Which puts the market value of its share price up to the whim of the optimism that is in the market.
Which explains the volatility.
We're just back to the balance between a bird in the hand versus two in the bush.
The overall growth of the company is indisputable. The most important growth has been in market share and influence within the wireless industry. The media now refers to Qualcomm as telcom giant, instead of pesky startup.
Absolutely, I agree with you 100%. The difference between a fine company and a fine stock is the price of admission.
Sorry for the rant.
John |
