Analysts: Christopher Carson, Travis Hirt, Applied Portfolio Management Arek Kozaczuk and Bryan Lunzmann
QCOM QUALCOMM Incorporated Sector: Information Technology HOLD
Report Date: 4/25/2015 Market Cap (mm) $125,097 Annual Dividend $1.61 2-Yr Beta (S&P 500 Index) 1.19 Return on Capital 72.6% Dividend Yield 2.2% Annualized Alpha -3.1% Compared With: sd $4.81 Price/Earnings (ttm) 15.5 Institutional Ownership 6.4% Intel Corporation Current Price $74.33 Economic Value-Added (ttm) $5,947 Short Interest (% of Shares) 1.0% Cisco Systems, Inc. 12-mo. Target Price $76.00 Free Cash Flow Margin 29.1% Days to Cover Short 1.3 and the S&P 500 Index
Business Description QCOM INTC CSCO QUALCOMM Incorporated designs, develops, manufactures, and 60% markets digital communications products and services in China, South 50% 40% Korea, Taiwan, and the United States. The company operates through 30% three segments: Qualcomm CDMA Technologies (QCT), Qualcomm 20% Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI). 10% 0% The QCT segment develops and supplies integrated circuits and -10% system software based on code division multiple access (CDMA), -20% orthogonal frequency division multiple access (OFDMA), and other -30% technologies for use in voice and data communications, networking,
Investment Thesis QCOM ^SPX QCOM has a strong history of generating strong free cash flows, with 20% a superior ROIC of 73% for 2014. Despite paying low dividends, they 15% have seen aggressive growth in the recent past, with a 24% 3-year 10% 5% CAGR. Based on conservative forecasting, the original thesis from two 0% years ago was correct in identifying an undervaluation; however, it -5% has since become roughly fairly valued. They have a strong history of -10% generating free cash flow, and growing dividends, all while increasing -15% EVA at three year rates of 22.2%, 23.9% and 20.1% respectively. Given -20% the strength in key ratios like NOPAT and ROIC compared to key competitor Intel, their current valuation is justified, and we recommend a hold. ROA ROE ROIC 90% 80% ANNUALIZED 3-YEAR CAGR 70% 60% Total Revenue 21.0% Free Cash Flow 22.2% 50% 40% EBIT 16.1% Total Invested Capital 11.6% 30% NOPAT 18.8% Total Assets 10.1% 20% Earnings Per Share 22.6% Economic Value-Added 20.1% 10% 0% Dividends Per Share 23.9% Market Value-Added 10.5% 2009 2010 2011 2012 2013 2014
Margins and Yields 2010 2011 2012 2013 2014 EBIT Net Operating Profit After Tax Operating Margin 33.9% 34.4% 30.1% 30.4% 30.3% $9,000 Free Cash Flow Margin 23.5% 28.8% 24.7% 31.1% 29.1% $8,000 Earnings Yield 4.0% 4.7% 5.8% 5.4% 6.4% $7,000 Dividend Yield 1.5% 1.5% 1.5% 1.6% 2.1% $6,000 $5,000 $4,000 Per Share Metrics 2010 2011 2012 2013 2014 $3,000 Earnings 1.98 2.57 3.59 4.00 4.73 $2,000 $1,000 Dividends 0.72 0.81 0.93 1.20 1.54 $0 NOPAT 1.78 2.48 2.73 3.68 4.10 2009 2010 2011 2012 2013 2014 Free Cash Flow 1.29 1.94 3.18 2.28 3.49
Economic Value-Added Market Valued-Added Price/Earnings Price/Free Cash Flow $7,000 $100,000 60 $6,000 $90,000 $80,000 50 $5,000 $70,000 40 $4,000 $60,000 $50,000 30 $3,000 $40,000 20 $2,000 $30,000 $20,000 10 $1,000 $10,000 $0 $0 0 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014
Datasource: Capital IQ