Sands Brothers Cover QCOM
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QUALCOMM, INC. (NASDAQ: QCOM) Reiterating Buy Recommendation And Increasing Price Target To $123, From $94.
Company Description:. Based in San Diego, Qualcomm invented CDMA wireless communications technology and holds patents covering many important aspects of CDMA network development. Importantly, no other company owns significant technological rights related to CDMA. Qualcomm makes money principally by a)charging royalties for the use of its patented CDMA processes and b) selling CDMA chipsets and software that incorporate its technology. The Company is expected to spin off its chipset business, probably late in 2001. Other, smaller business segments include OmniTRACS, a satellite positioning service marketed to the trucking industry, and Eudora, popular e-mail software.
Investment Conclusion We are reiterating our Buy recommendation on Qualcomm, with a new, higher 12-month price target of $123. Our previous price target was $94. We base our new price target on a 19x multiple of discounted projected free cash flow for 2000-2010. Our continuing positive view on the stock is based on the following factors:
Key Highlights
Financial Projections And New $123 Target Price. Our new $123 price target incorporates higher revenue growth assumptions for the Company’s technology and chip sectors, compared with our prior financial projections. We justify these higher figures based upon a) our expectation that the enormous 3G infrastructure build in Europe will provide a substantial new revenue stream for Qualcomm, and
In a recent conference call, Qualcomm said that it was “comfortable” with current EPS pro forma 1 consensus estimates of $0.28 for 1Q’01 and $1.26 for fiscal 2001. However, the Company declined to provide any guidance regarding revenues in 2001, or any other future financial information. Our projections show pro forma cash EPS of $0.28 for the first quarter of fiscal 2001 and EPS of $1.30 for the full fiscal year.
We have incorporated Qualcomm’s recently-announced $80 million one-time charge in 1Q’01 and $4 million per quarter charges for the next three years into our financial model. Such charges are related to the Company’s mandated payment of royalties to the Korean Electronics and Telecommunications Research Institute (ETRI). These changes, though, are excluded from our calculation of “cash” EPS.
4Q’00 Financial Results. Qualcomm reported 4Q’00 pro forma cash EPS of $0.25, slightly ahead of consensus estimates of $0.24. In the quarter, the Company’s revenues of $635 million were lower than expectations because of reduced chipset sales to the Korean market. (Earlier in the year, the Korean government ended handset subsidies, which lowered handset volumes in this large CDMA market). Despite this shortfall, Qualcomm opined that worldwide CDMA handset sales will rise 42% in calendar 2000, to about 60 million. There are several reasons to be optimistic about the Korean handset market, including a) operators’ efforts to get around the subsidy ban by offering other incentives,
b) the introduction of 1xRTT in the country, and c) good subscriber growth in October. Qualcomm’s license fee revenue in the quarter rose 7%, to $186.0 million, compared with 3Q’00. The Company noted that it is "comfortable" with current EPS pro forma consensus estimates of $0.28 for 1Q’01 and $1.27 for fiscal 2001.
Technological Supremacy of CDMA. Qualcomm is the only company in the world that owns substantial patents for the manufacture of CDMA chipsets. The superior clarity offered by CDMA technology, among other reasons, mandates its employment in ALL 3G cellular systems. The Company’s CDMA technology, therefore, offers the only clear path to high-speed wireless applications.
W-CDMA Users Also Will Pay Royalties to QCOM. All GSM and TDMA systems presently competing against CDMA are likely to transition over the next five years to W-CDMA, in which Qualcomm holds numerous enforceable patents.
Anticipated Rapid 3G Build In Europe. Over the past several months, it has become clear that European cellular operators will pursue an aggressive buildout of 3G networks in Europe. These operators’ need to provide 3G service quickly, to recoup the large prices paid for 3G spectrum. Since all 3G applications use QCOM technology and chips, we see this compressed timetable as a big positive for Qualcomm.
Focused Business Strategy. During the past year, QCOM sold off both its handset and network businesses. The Company is expected to spin off its chip manufacturing business to its shareholders in a tax-free transaction, probably in late 2001. With these divestitures, Qualcomm will become a pure play wireless technology company.
CDMA Opportunities in China. Over the past several months, Qualcomm has made real progress with China Unicom, the second-largest cellular provider in China. Having previously given conflicting signals about its intentions regarding the usage of CDMA technology in its new cellular systems, Unicom now seems to be committed to adopting CDMA in at least a portion of its network. Qualcomm hopes that Unicom will begin to deploy a CDMA system by as early as the third quarter of 2001. China is the world’s largest (potential) cellular market, and therefore this business represents an important win for Qualcomm
1 Qualcomm’s pro forma results differ from its reported results in that PF financials exclude sales and costs associated with the handset manufacturing business, sold in February 2000 to Kyocera. Specifically, the PF results exclude operating costs related to this business, employer payroll taxes, employee termination charges, and contingent liabilities. PF results, importantly, also exclude amortization of goodwill from the March 2000 acquisition of Snaptrac, and all one-time charges.
2) our belief that China Unicom will begin to construct a CDMA network as early as the first half of 2001.
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