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Strategies & Market Trends : Gorilla and King Portfolio candidates - Moderated
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To: Mike Buckley who wrote (959)6/15/2004 12:07:15 PM
From: Jim Mullens  Read Replies (1) of 2955
 
Mike/ all, re: Qualcomm DCF evaluation, and “On the other hand, I do agree with you that DCF analysis doesn't address risk in the manner I think Jim was perceiving.”

On the contrary, again referring to the Quicken DCF tool (no longer free)
–
1. One plugs in the base year earnings
2. shares outstanding
3. The future long term growth rate
4. the Discount rate

The Quicken discount rate variable considers both the cost of money (LT Bond) and investment/ market risk.

If one only wanted to discount to present value without any “investment “ risk one would plug in 5½ to 6% (30 year T Bonds)

U.S. Treasury Bonds
Maturity Yield Yesterday Last Week Last Month


30 Year..............5.39......5.52........5.44

I’ve run various scenarios with 6% for the QTL segment as I consider the Q’s royalty revenue to be more stable than QCT’s as 3G CDMA/WCDMA ramps.

For QTL alone I got the following “intrinsic” value per share at various growth rates-

1.FY 03 earnings...$639.310M
2. Growth rates.....................38%......30%......25%......17%
3. Discount rates......................6%.......6%........6%........5%
4. Result= “intrinsic” $/sh......$240......$137....$95..........$58

As one increases the discount rate (compensating for higher risk), the “intrinsic” value declines.

As I recall, Quicken uses 11% as the benchmark discount rate for the more mature S&P companies with lower betas, but a default rate of 15- 16% for most companies.

In that same Quicken exercise I used the following for QCT-

1. FY 03 earnings...........$533,456M
2. Growth rate...........................20%
3. Discount rate........................11% (S&P benchmark)
4. Result= “Intrinsic” $/SH......$35.81

Combining the results-

QTL $/sh...............$95 at 25% growth 6% discount rate
QCT.........................36
Cash..........................7
Other..............................
Total......................$138

Running the above with the Quicken default discount rate of 15- 16% as I recall lowers the QCOM “intrinsic” value to somewhere in the $60’s / share.

That’s why I believe the DCF methodology, with its discounting mechanism (if one uses the higher rates), is not an appropriate tool to value Qualcomm as it cautions against owning as not worth the risk.
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