Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing’s for sure: You’ll never discover truly great investments unless you actively look for them. Let’s discuss the ideal qualities of a perfect stock, then decide if QUALCOMM, Inc. (NASDAQ:QCOM) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
1), Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it’s certainly a better sign than a stagnant top line.
2). Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
3). Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management’s attention. Companies with strong balance sheets don’t have to worry about the distraction of debt.
4). Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
5). Valuation. You can’t afford to pay too much for even the best companies. By using normalized figures, you can see how a stock’s simple earnings multiple fits into a longer-term context.
6). Dividends. For tangible proof of profits, a check to shareholders every three months can’t be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let’s take a closer look at Qualcomm, noting that in light of recent events which we’ll discuss below, all of these past financials are no longer indicative of the company’s future.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-year annual revenue growth > 15%||17.1%||Pass|
|1-year revenue growth > 12%||25.6%||Pass|
|Margins||Gross margin > 35%||63%||Pass|
|Net margin > 15%||32.3%||Pass|
|Balance sheet||Debt to equity < 50%||0.1%||Pass|
|Current ratio > 1.3||3.42||Pass|
|Opportunities||Return on equity > 15%||18.1%||Pass|
|Valuation||Normalized P/E < 20||25.67||Fail|
|Dividends||Current yield > 2%||1.5%||Fail|
|5-year dividend growth > 10%||12.3%||Pass|
|Total score||8 out of 10|
Since we looked at Qualcomm last year, the company has gained a point for the second year in a row. Revenue growth accelerated enough to pull up the five-year figure, even though the stock has gained less than 10% over the past year.
Qualcomm made the right call when it focused on high-end mobile chips, as it has a huge 48% revenue share of smartphone applications processors with a particular focus on popular high-end products. By contrast, PC processor giant Intel Corporation (NASDAQ:INTC) has only 0.2% share in the smartphone processor market, showing just how badly Intel has missed the boat on mobile. As a result, Qualcomm has passed Intel in terms of market capitalization, and its huge growth rates have helped it beat out Texas Instruments Incorporated (NASDAQ:TXN) to become the No. 3 overall chip manufacturer. As more countries around the world shift to faster data networks, Qualcomm stands to benefit even more from this trend, both through greater processor sales and from licensing of the company’s patents.
Recently, the big point of contention for Qualcomm has been whether it will get its processor chips into more smartphones and tablets. Qualcomm has been able to keep most of the smartphone market, but rival NVIDIA Corporation (NASDAQ:NVDA) has been successful in getting its Tegra line of chips into such popular tablets as the Nexus 7 and Surface RT. But recent reports suggest that the new Nexus 7 line may use a processor from Qualcomm’s Snapdragon line rather than a Tegra chip, threatening NVIDIA’s place in the tablet.
For Qualcomm to improve, it needs to use the move toward 4G networks to build up even bigger profits and start returning more of those earnings back to investors through dividends. If it keeps growing the way it has, though, Qualcomm could easily reach perfection by this time next year.
The article Has Qualcomm Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel and Qualcomm.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.