CSFB Cabi on QCOM - BUY
MID CAP
Qualcomm (QCOM)
Qualcomm Upgrading to BUY; New Focus Provides Opportunity For
Success
Summary
Qualcomm's move to divest itself of its infrastructure
business is likely to help the company improve on its
historically lackluster margins.
We are upgrading the stock to reflect that Qualcomm has
several strong businesses that are likely to do better as the
company focuses on them for its core growth.
With the elimination of the losses from infrastructure and
the expectation that the company will show improving margins,
we are raising our estimates, on a preliminary basis, to $3.
50 from $3.35 for FY:00.
Price Target Mkt.Value 52-Week
3/26/991 (12mo.) Div. Yield (MM) Price Range
111.56 $125 $0 None $8,277.8 $0
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
9/00E $3.42 3.35 33.3X 9% 13.0 $8.24
9/99E 2.71 41.2 9% 15.9 6.78
9/98A 1.63 68.4 9% 21.3 5.16
Dec. March June Sept. FY End
2000E $0.79 $0.80 $0.90 $0.93 Sept.
1999E 0.65 0.60 0.71 0.74
1998A 0.58 0.25 0.27 0.54
ROIC (12/97)
Total Debt (12/98) 3116
Book Value/Share (12/98) 13.67
WACC (12/97)
Debt/Total Capital (12/98) 22.5
Common Shares 74.2
EP Trend2
Est. 5-Yr. EPS Growth 15%
Est. 5-Yr. Div. Growth NA
1On 3/29/99 DJIA closed at 9822.2 and S&P 500 at 1282.6.
2Economic profit trend.
Qualcomm, the innovator of CDMA, manufactures infrastructure
and handsets, as well as licenses its patented technology to
major wireless handset and infrastructure manufacturers. In
addition, it designs and develops CDMA chipsets, email
software, 2-way mobile satellite systems and supplies
equipment to the Globalstar network.
Investment Summary
We applaud Qualcomm on its move to divest itself of its
wireless infrastructure business, a business that has
contributed to margin degradation for the past two years. As
a small player in the wireless market, we were amazed that
Qualcomm continued to compete amongst large brutal
competitors including Ericsson, Lucent and Nortel. With the
sale of its infrastructure business, we believe Qualcomm
management has affirmed its commitment to becoming a
profitable, focused player in the wireless industry. As a
result we are upgrading the shares to a BUY from HOLD to
reaffirm our satisfaction of the company's decision.
Although the stock has moved substantially over the past two
trading days, Qualcomm is now in a position, in our view, to
move its profitability closer to industry average margins,
thus a substantial earnings upgrade is feasible over the next
two years. We are currently revising our FY 2000 estimate to
reflect this change. Our preliminary estimate range is $3.50
for fiscal 2000. Our previous estimate was $3.35. We expect to
publish our detailed model after a further review with
management.
Sale of Infrastructure business key to expanding margins
Qualcomm's move to divest itself of its infrastructure
business is likely to help the company improve on its
historically lackluster margins. We estimate the
infrastructure business generated approximately $500-600
million in revenues for FY:98 and potentially could have lost
as much as $80 million. We now expect that the company can
eliminate the management distraction of a business segment
plagued with challenges as an independent entity and move
forward with its corporate plan to show improving margins toward
industry averages.
Focus on core businesses translates into solid returns
We upgraded the stock to reflect the fact that Qualcomm has
several strong businesses that are likely to do better as the
company focuses in them for its core growth. Qualcomm has
proven it can be a very solid player in the CDMA chip set
business and continues to garner a substantial market share
position in that market. We anticipate that with the CDMA
market growing at a solid near 100% rate the next two years,
the company can demonstrate solid revenue growth despite the
onset of price erosion. With a more focused organization
free of conflict with its customers, the company may even
manage the erosion factors to continue to show solid returns from
that business segment.
In handsets, Qualcomm has demonstrated that it can develop
consumer friendly products. With a renewed focus on
profitability in this segment, the company could make
substantial gains in this business. Importantly, with a
focus on improving quality, which was problematic last year,
the company could eliminate a substantial amount of reworking
expenses that were required on its products. Industry
average operating margins for the handset business are well
into the double digits while Qualcomm remains in the low
single digits. Although challenges remain, we expect that
the company is committed to improving on this metric. With
pricing for CDMA eroding at a rate over 20%, the company will
be required to take aggressive steps to reduce costs and
exploit scale volume benefits through growth. We believe
that free of the infrastructure influence, the company can free
capital resources to fund the growth of this business.
Raising to BUY
With the elimination of the losses from infrastructure and
the expectation that the company will show improving margins,
we are raising our FY 2000 estimate to $3.50 from $3.35 for
FY:00. We are also upgrading our rating to BUY to reflect
our endorsement of Qualcomm's new management focus on margin
improvement and profitable growth. |
