Gorilla and King Portfolio candidates - Moderated Message Board

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Strategies & Market Trends : Gorilla and King Portfolio candidates - Moderated

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To: Jim Mullens who wrote (214)	10/31/2003 4:00:31 PM
From: Mike Buckley	Read Replies (2) of 2955

Jim, Qualcomm's latest earning report (June qtr)- balance sheet ... reflects $5B [for cash and marketable securities]. Only if you round $4.4 billion up to $5 billion. I stand by my numbers and my comment that you accidentally overstated the 9-month increase in cash and marketable securities by nearly $260 million. Everything is substantiated in Qualcomm's Q3 earnings report and the corresponding 10Q. 1. Qualcomm is trading at 26 times FCF ($38B mkt cap/ $1.451B FCF annualized). Do you know how this compares with the overall market ? No and I wouldn't know how to find that information. Let me know if you come up with something. You might want to consider basing the multiple on the enterprise value rather than or in addition to the market cap. The market cap is comparatively meaningless to me. If the cash and marketable securities continues to rapidly grow, the difference between the two multiples will increase. You appear to be saying that you are valuing QCOM based on 10 years of FCF- the 7 prior years and 3 future years with FCF increasing 50% each year. No. If the benchmark is an enterprise value-to- trailing free cash flow of 10, it only means that the benchmark is to pay for 10 years' worth of the previous 12 months' free cash flow. To clarify what I'm saying: In round numbers, the current "earnings yield" mentioned in my previous post is about equal to the yield of the 10-year bond. Considering that the bond's yield is guaranteed by the full faith and credit of the U. S. government (and investing in the stock has no guarantees), when using that metric the stock is priced to perfection. Are you in effect saying that per your methodology that Qualcomm would be presently fairly valued only if it generates $4.9B in FCF in 2006? Aside from the fact that I'm not smart enough to understand your question, I think it's very difficult to determine the fair value. However, if you've seen the RTW fair value as determined by the assumptions in their discounted cash flow analysis, you realize that it also supports the idea that the stock is priced to perfection if not more so. Does this seem reasonable? Your assumptions include that the stock price will remain the same even if the company increases free cash flow 50%annually for the next three years. That seems to ignore my comment that if indeed free cash flow continues to increase at that rate, the stock's price will surely rise. Your chart assumes that Qualcomm will increase FCF 40% annually from FY00 - FY06. Correct me if I'm wrong, but I don't believe very many companies have done that for six years after having achieved $500 million in FCF. If I'm right about that, that expectation is indeed one of perfection. I hope you're estimates are accurate, but I think they assume perfection. Now that I've answered bunches of your questions, I've only got one for you: What do you think today's fair value is? --Mike Buckley

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