<Assuming a share dilution of 4% per year>
Recently QCOM announced that it would either begin paying a dividend or the repurchase of common shares, using a cash pile that increased by over 1 billion last years and figures to increase by even more annually in the future. It is therefore reasonable to assume that the share buyback/dividend payout will only increase in magnitude over the course of the next 10-15 years.Does your model account for this effect upon eps/return?
<No need to point out to you that a company earning $0.44 per share priced in double digits has growth built into the price>
We all know your fondness for the GAAP number, but since we are projecting earnings 15 years hence, it is a wildly unrealistic base to start from. QCOM is already winding up its investments to promote the spread of CDMA, and understandably, as its use becomes more widespread the strategic need for such investments correspondingly evaporates. Reasonable minds can differ to a degree as to how quickly the investment division will wind down, but its not likely to be a factor for most of the years in your 15 year horizon, and certainly will be no factor at all by year 15. If you are going to project earnings 15 years from now, you should do so on the basis of the units that will still be in operation at that time. That number is the pro forma number, however distasteful that word is to you. You also know that the GAAP number is a depressed number even of current results, given the fact that Q recognizes unrealized losses, but not unrealized gains, in its reported results.
< And maybe by then the 25 year old company has matured enough to a blue chip company and command a traditional PE for a healthy and growing big company of about 17 or so. Which would make expected earnings per share about $10 per today-share.
Which would be about 22x what they are earning today (or 16 x forward pro-forma earnings, if you like).>
QCOM has estimated 2003 pro forma (that's forward,right?) at 1.25/share. They have stated that this is a very conservative estimate and have indicated that they "see upside" in that number. $10 is but 8 times this conservative estimate. I imagine you are incorporating your projected 4% annual share dilution to reach this multiple, without any corresponding deduction for share repurchase/dividends during the next 15 years. These repurchases/dividends are to be paid from a pile of unencumbered cash that increased in size by almost 50% this past year (2 billion to 3 billion), and is already more than 10% of market cap, even with the recent runup. The math would suggest the likelihood that the repurchases /dividends will at least offset your 4%, and most likely will exceed it.
<If current results are based on 15 million handset sales per six months, then future results are equivalent to today's business doing 330 million handset sales per six months Which is roughly planetary saturation. And a fairly assigned PE of 17 implies a further two decades or so forecast sustained results at or above this level. In other words, my "gloomy" assumption has to be that CDMA will be the dominant wireless technology on the planet for the next 35 years.>
The flaw here is that its nowhere close to planetary saturation. Its only 6x more than the total handsets sold this year, with the vast majority of the world as yet unserved.As innovation cycles compress , replacements will add more and more to total sales from this constantly increasing worldwide base of subscribers. An even greater flaw is that its about so much more than handsets. Given a 15 year horizon, this isn't speculation. Its a certainty. The direction is away from tethered and towards untethered for the whole range of communications functions, be they between humans, machines, appliances or some combination of the three. You also make the assumption that QCOM is no more, and never will be anything more, than a CDMA powerhouse. I don't think you can calculate this into financial projections, but I think even you would acknowledge the intellectual capital and demonstrated superior engineering creativity of the company. Jim mentioned to you a few other revenue streams which are already in sight. It is fantasy to assume that no others will emerge over the next 15 years.
I would, as always, appreciate your reactions, and be assured that differences of opinions on investments is nowhere close to being on my list of reasons not to like people. |
