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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Jean M. Gauthier who wrote (1799)	5/8/1999 11:56:00 AM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

Jean, I'll get back to you about why I think Qualcomm is a buy. Right now I'm in a rush to get out the door. --Mike Buckley

To: Jean M. Gauthier who wrote (1799)	5/8/1999 1:14:00 PM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

Jean, With a smile like that, how could I not respond to each of your ideas? :) My schedule changed, allowing me time for a quick response. Using an earnings run rate of $4.80 and 40% annual growth, the earnings will be $6.70 one year from now and $9.40 two years from now. That produces a one-year forward PE of 32 and a two-year forward PE of 23. The stock is currently selling at a run-rate PE of 45, about the same as my estimated earnings growth. That's a traditional metric that almost always undervalues a potential gorilla or established gorilla. That's why I think the stock is at worst fairly valued and at best undervalued. I have no problem thinking a stock that is fairly valued and expected to grow 40% annually as a buy. 1- Cisco's IOS is a bit like Softy's OS lock And I think QCOM's CDMA is a bit like both of their locks, but more like Intel's lock. 2- Web Sales & Support, so margins stay high & COS low. Is there any reason the same can't be true for Qualcomm? 3- Very high margins, what 65% + ? You've got me there, but I have to mention that I was one of the first if not the first to raise the issue of Qualcomm's relatively low margins. 4- Very High growth Sales/ profits... Not true also for Qualcomm? 5- Exploding market , I guess like CDMA/3G Qualcomm CDMA subscribers are growing 25% per quarter, faster than Cisco's market. 6- fabless/construction-less, more of a software company.. Qualcomm is also fabless though I'm not ignoring that they depend on fabs to get the product out for part of their revenue stream. There is no dependency on fabs for other parts of their revenue stream. How did I do? :) Now comparing Qualcomm's valuation with Cisco: Where Qualcomm's run-rate PE is 45, Cisco's run-rate PE is 75 and the trailing PE is 82. Where I peg Qualcomm's earnings growth over the next two years at 40% annually, the analysts are pegging Cisco's growth rate at roughly 25%. Qualcomm's run-rate PE/Growth is about 1.1 (using my estimates, not the analysts' published estimates) and Cisco's run-rate PE/Growth is about 3.0. Big difference that is never important to the rest of the market but is very important to me. My source for PSRs is not immediately available but I'm sure Cisco's is much lower than Qualcomm's. That's probably due to Qualcomm's lower margins. All in all, I don't pretend to have a crystal ball so I could be very wrong about Qualcomm's growth in the next couple of years. But I don't think I'm entirely out of line based on everything I've read. But the valuation metrics I use certainly do refute (for me) your idea that Qualcomm "is much more highly valued than Cisco by any stretch of the imagination." Now that I've responded to the issues you raise, what quantitative method of valuation do you use to arrive at Qualcomm's fair value? --Mike Buckley