QUALCOMM, Inc. (QCOM) a Buy in 2013: Broadcom Corporation (NASDAQ:BRCM)

While I don’t believe there is any real concern around margins at the time, it is worth noting that Broadcom Corporation (NASDAQ:BRCM) has recently announced intentions to develop components that, if released to the open market, would directly compete with QUALCOMM, Inc. (NASDAQ:QCOM)’s core CDMA, TDMA, and OFDMA (3G/4G) products.  Any price competition stemming from this release would likely have a material impact as it would offset the ~25% increase in average MSM sale price noted earlier.

GAAP-based EPS expectations are $4.04 in 2013 and $4.60 in 2014.  Using earnings multiples of 19 and 18, respectively, I arrive at my price targets of $77 and $83 per share.  Historically, dividend payouts have been 9% of EPS and on Mar 5 the company boosted its payout 40% in an effort to try and restore these levels.  Based on my EPS estimate and expectations that the company will continue to reach for a 9% payout I expect a dividend increase to $0.38-0.40 around March 2014.

In 2012, free cash flow fell 65% versus 2011 levels primarily due to an 89% year-over-year increase in purchase obligations.  Excluding the increase in purchase obligations, free cash flow still fell 12.5% primarily due to a 33% increase in capital expenses.  Both of these measures are indicative of future sales growth which is a notion supported by historic measures such as inventory turnover as explained earlier.  Moving forward, free cash flow is expected to grow 22% and 19% in 2013 and 2014 as the investments made in 2012 are put to work.  Using a 3-factor model that accounts for capital structure and market multiples, this increase in cash flow produces an $85 2014 price target that is roughly in-line with my EPS based estimate.

The article Qualcomm a Buy in 2013 originally appeared on Fool.com and is written by Zach Carvalho.

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