QUALCOMM's Analyst Day Lays Out Solid Strategic Roadmap, But Underwhelms On
Near-Term Catalysts
From To
Changes (Previous) (Current)
Rating -- Outperform
Price Tgt -- $38
FY02E EPS -- $0.89
FY03E EPS -- $1.05
FY02E Rev (mil) -- $2,783.4
FY03E Rev (mil) -- $3,075.0
Key Points:
* Well Positioned For The Long Term. We believe QUALCOMM's technology roadmap is
solid and is best exemplified by the smooth transition from 2G to 2.5G
solutions, which is taking place today. QUALCOMM is capitalizing on new
opportunities and continues to gain new interest from worldwide carriers which
bodes well for long term growth. QUALCOMM maintains FY02 EPS guidance of
$0.90-$0.95 compared to our and the Street estimate of $0.89. Although
$0.90-$0.92 may be achievable, we do not believe $0.93-$0.95 is.
* Reiterates Jun02 Guidance. QUALCOMM reiterated Q302 guidance of 3%-6%
sequential sales growth, and EPS of $0.21-$0.23. We are forecasting sales to
grow 5.6% Q/Q with EPS of $0.22. QCOM expects to ship 10 MM 1xRTT chipsets
(total of 15-16 MM) in Q302, up from ~8 MM in Q202.
* Korea, Japan And The United States. 1xRTT continues to build momentum as color
screens and BREW applications have fueled replacement cycles. In Japan, KDDI
launched its 1xRTT network in early April and reported 334k net additions in the
month, exceeding expectations. As of mid-May, 1xRTT adoption has grown from 6
to 9 MM users in the past 6 weeks. Verizon and Sprint PCS are expected to have
nationwide 1xRTT coverage by YE 2002.
* Channels Stocked, Stuffed Or Chocked? QUALCOMM believes there is ~13 weeks of
CDMA inventory in the channel. Channel inventory is considered "from chip
shipment to subscriber purchase." This equates to ~18-22 MM chipsets. Assuming
50% of the 13-week estimate is handsets in the channel, this represents 6-7
weeks of inventory with carriers. We believe the robust channel level validates
our belief that QCOM will not be able to achieve the high end of its $0.90-$0.95
FY02 EPS guidance.
* Attractive Valuation. While we believe that QUALCOMM will not meet the high
end of its range, we are confident that QUALCOMM will meet or exceed our
estimate of $0.89 and believe that on a valuation basis the stock is
attractively priced. We reiterate our Outperform rating and price target of $38,
which is based on 36x FY03 EPS of $1.05.
Price: $31.37
52-Wk Range: $71.04-$24.63
Price Target: $38
(36x FY03 EPS of $1.05)
Shares Out (mil): 809.0
Market Cap (mil): $25,378
Avg Daily Vol (000): 14,301
Book Value/Share: $6.58
Cash Per Share: $2.73
Debt to Total Capital: 0%
Div (ann) - Yield: Nil
Est LT EPS Growth 15%-20%
P/E to LT Growth (2002): 2.0x
Est Next Rep Date: July 2002
FY End: Sep. 2002
Rev (mil) 2001 2002E 2003E
Dec $655.2 $692.7A $770.0
Mar $717.1 $659.3A $745.0
June $656.6 $696.0 $762.0
Sep $650.8 $735.4 $798.0
FY $2,679.8 $2,783.4 $3,075.0
CY $2,717.3 $2,860.7 $3,167.0
FY RM 9.5x 9.1x 8.3x
CY RM 9.3x 8.9x 8.0x
EPS 2001 2002E 2003E
Dec $0.23 $0.23A $0.26
Mar $0.26 $0.20A $0.25
Jun $0.20 $0.22 $0.26
Sep $0.19 $0.24 $0.28
FY $0.88 $0.89 $1.05
CY $0.88 $0.91 $1.07
FY P/E 35.6x 35.2x 29.9x
CY P/E 35.6x 34.5x 29.3x
Note: EPS are fully diluted.
* INVESTMENT RECOMMENDATION:
We continue to believe that QUALCOMM is one of the best-positioned long-term
plays in the wireless industry. We have enhanced confidence that the rollout of
1xRTT will provide sufficient incentive to spur handset replacements in Korea
and Japan. QCOM will likely benefit from channel filling of 1xRTT handsets in
the US through the Sep02 quarter, however it's too early to measure general
acceptance of services. We are comfortable with our $0.89 EPS for FY02 and
believe good evidence of end user demand in the US in 2003 could add $0.02
-$0.03 upside to our estimate of $1.05 in FY03.
Company Description:
QUALCOMM Incorporated (#) is a leading developer and manufacturer of digital
wireless communications products based on Code Division Multiple Access (CDMA)
technology.
Additional Details
Verizon (#) And Sprint PCS (#). The leading two CDMA carriers are preparing to
roll out cdma 1xRTT services in the United States in earnest. Verizon has
already announced a limited introduction of services in February 2002 and is
expected to achieve nationwide coverage by year-end 2002. Earlier this week
Verizon announced an all you can eat bucket plan for data services, which we
believe should be well received by consumers given attractive services are
introduced. Sprint PCS announced that its cdma1xRTT network will be launched in
August 2002. We believe both carriers are close to moving to the purchase of
only cdma1xRTT handsets with embedded BREW, which puts the pressure on suppliers
such as Nokia (^#), which currently does not have plans to adopt BREW on its
cdma1xRTT handset platform.
CSM Sales Expected To Decline. CSM sales are expected to decline in 2003 as
major network buildouts in Korea, Japan and United States are brought to
conclusion. CSM sales comprise ~10% of total QCT sales. We believe a decline in
CSM sales and associated royalties will be offset by growth in MSM sales for
handsets.
Equity Investments. Management indicated that it plans to divest all or part of
its $800 MM investment in Vesper, the leading CDMA carrier in Brazil. They hope
to find a strategic partner/s over the next 12 months. We believe likely
investors include Telefonica or Portugal Telecom, both of which have
aggressively expanded into South America's largest wireless market. Telefonica
is presently working to close a deal in Mexico to acquire 65% interest in Pegaso
PCS. Inquam, QUALCOMM's European investment arm, is aggressively pursuing the
acquisition of 450 MHz carriers. With a cdma 1xRTT network already constructed
and operational in Romania we expect Inquam to turn its attention on Bulgaria,
Russia, and possibly Morocco in Africa. QUALCOMM has already invested $103 MM in
Inquam with $97 MM of outstanding commitments likely be fulfilled by year-end
2002. We believe that it is highly likely that QCOM will pump as much as an
additional $300 MM into this venture to foster the acceleration of CDMA adoption
in greater Europe.
Conversations with QUALCOMM and Ericsson (#^), lead us to believe that Ericsson
will most likely not utilize the $400 MM commitment outstanding to Ericsson for
vendor financing. Ericsson is required to meet certain criteria including the
matching of vendor financing with its own resources. Given Ericsson's
challenging financial situation we believe Ericsson will practice a conservative
fiscal policy over the near/medium term. This bodes well for QUALCOMM, in that
this lowers its real open commitments and allows the Company to invest these
resources elsewhere.
Initial Data Suggests The Voice/Data Model Works. After the rollout of 1xRTT
services in Korea by KT Freetel, the operator has reported a $7.00 increase in
ARPU's. Although early in adoption, this early data validates the thesis that
the introduction of data services to mobile platforms does enhance carrier
ARPU's. This early success provides credence to the move by carriers to
introduce data applications to wireless service product offerings.
Valuation. At its current price level, we believe QUALCOMM is attractively
valued. Our price target is $38, which is based on 36x FY03 EPS of $1.05. We are
forecasting a long term EPS growth rate of 15-20% and we believe QUALCOMM
should trade at 2x this growth rate. QUALCOMM's comparable group trades at ~60x
FY03 estimates, significantly higher than QUALCOMM's valuation. Given QUALCOMM's
long-term growth prospects, which include solid exposure in Korea, Japan, the
United States, China and India, we believe QUALCOMM's valuation represents a
solid investment opportunity at present levels. |
