Qualcomm Offers Growth At A Reasonable Price

Hedge funds liked QUALCOMM, Inc. (NASDAQ:QCOM) during the second quarter, as at the end of June the company made our list of the ten most popular stocks among hedge funds. 76 funds and other notable investors reported a long position in the telecommunications products and services company on their 13F filings (see the full rankings). Billionaire Ken Fisher’s Fisher Asset Management was one of the funds which liked Qualcomm, actually increasing its stake in the company by 63% over the course of the quarter to a total of 9.3 million shares. Find more stock picks from billionaire Ken Fisher. QUALCOMM, Inc. was the second largest position by market value in Discovery Capital Management’s 13F portfolio, with the fund’s 8.8 million shares being 75% higher than what the fund had owned at the beginning of April. Discovery is managed by Tiger Cub Rob Citrone (research more top stocks from Discovery Capital Management).


The first nine months of Qualcomm’s fiscal year, up through the end of June (the company has a September fiscal year end), were a period of considerable growth. Revenue was up 18% in the third fiscal quarter, which was actually a slowdown from earlier quarters; the company’s top line for the first three quarters of the fiscal year was 31% higher than in the same period a year earlier. Still, double-digit revenue growth rates for such a large (~$100 billion market cap) company is impressive. Margins have held about steady, and so net income increased 16% last quarter versus a year ago.

At 17 times trailing earnings with a 1.7% dividend yield, QUALCOMM, Inc. trades at a reasonable price given its considerable growth rates. Even if its growth continues to slow down, even modestly higher earnings would justify a higher stock price. The stock trades at only 14 times consensus estimates for the current fiscal year (ending in September 2013), and that’s certainly quite cheap. In addition, the company had over $13 billion in cash, cash equivalents, and marketable securities on its most recent balance sheet compared to only $5.5 billion in current liabilities. Our impression is that the stock is attractively priced and would certainly be worth considering.

We would compare Qualcomm to Motorola Solutions Inc (NYSE:MSI), Broadcom Corporation (NASDAQ:BRCM), Nokia Corporation (NYSE:NOK), and Texas Instruments Incorporated (NASDAQ:TXN). The first two of these companies carry trailing P/E multiples greater than 20 (though not by much- Broadcom’s is the higher of the two, at 25), representing a premium to Qualcomm. They have already reported their results for the third quarter, with Motorola seeing a large increase in earnings (though earnings from continued operations are lower so far this year than in 2011) and Broadcom’s earnings falling 19% from the third quarter of last year despite better revenue. On a forward basis, these two companies are actually about as cheap as Qualcomm or cheaper- Motorola trades at 14 times forward earnings estimates, and Broadcom’s forward P/E is 11- so they could be considered as well, though we would rather not be as dependent on the Street’s optimism proving correct.

Nokia is not expected to be profitable in 2012, and is also expected to see 7 cents per share of losses in 2013. Its revenue was also down last quarter versus the same period in 2011. It does have a high dividend yield (though note that dividend payments at the company tend to be inconsistent), but we still don’t think that it’s a good stock to buy on a value basis. Texas Instruments, however, does have a case going for it: the company saw strong earnings growth in its most recent quarter compared to the same point in the previous year, its P/E multiples- in the teens on both a trailing and a forward basis- are very close to Qualcomm’s, and the dividend yield is a bit higher at 2.9%. It could be an alternative for investors to look at.

We’d feel more comfortable buying Texas Instruments or Qualcomm, which do not need to rely as much on earnings growth to achieve their attractive forward earnings multiples, than Motorola Solutions or Broadcom. Both companies have been seeing higher net income and look like good stocks to buy.