Options Trade – Qualcomm (QCOM  ) Friday, March 08, 2013

Qualcomm Shares Preparing To Soar To New Multi-Year Highs!

Shareholders Dividend Increase Strengthens Stock Increase!

**OPTION TRADE: Buy the QCOM Jul 2013 65.000 call (QCOM130720C00065000) at or under $4.40, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.00.

by Ian Harvey

March 08, 2013


According to the International Data Corporation (LDC), the smartphone market will witness a Compound Annual Growth Rate (CAGR) of around 18% till 2016. Also, the tablet market will grow at a CAGR of about 23% during the same period. With this tremendous growth, the mobile chipset industry remains an interesting area for the investors to focus on.

QUALCOMM, INC. (NASDAQ: QCOM), is a qualifying member of this group. It is one of the few technology names that is trading near its highs established during the technology boom. It was also one of the most resilient stocks during the 2008 financial crisis. The stock has been a part of a beautiful uptrend that extends back to 2002. Currently, Qualcomm stock is trying to break above multi-year highs. Positive price momentum seems to be intact for this stock.

This semiconductor company, QCOM, with sound fundamentals, makes this stock a great addition to your portfolio. And now it seems the stock’s reaching a new high, as the company rewards its loyal investors with a whopping 40% increase in its quarterly dividend, coupled with a share buyback program worth $5 billion. What makes its management so confident about its near-term prospects?

The answer lies hidden in a host of factors, ranging from a faster design cycle, a solid headstart with regard to the ‘integration’ factor, and China sales. Even better, Qualcomm is one of the few companies promising a bright future, despite the prevalent macroeconomic headwinds.

About Qualcomm

QUALCOMM Incorporated (Qualcomm), incorporated on August 15, 1991, is engaged in design, manufacture, have manufactured on its behalf and market digital communications products and services based on code division multiple access (CDMA), Orthogonal Frequency Division Multiplexing (OFDMA) and other technologies.

The Company operates in four segments:

• Qualcomm CDMA Technologies (QCT);

• Qualcomm Technology Licensing (QTL);

• Qualcomm Wireless & Internet (QWI), and

• Qualcomm Strategic Initiatives (QSI).

The Company develops and supply integrated circuits and system software based on CDMA, OFDMA and other technologies for uses in voice and data communications, networking, application processing, multimedia and global positioning system products.

In November 2012, the Company acquired certain assets of EPOS Development, Ltd. (EPOS), developer of ultrasound technologies for input solutions, including pen, stylus and gesture recognition.

Qualcomm (QCOM) is the leader in development and commercialization of the Code Division Multiple Access (CDMA) technology. CDMA is one of the two main technologies used in global digital wireless communications networks, the other being Global System for Mobiles (GSM).

Qualcomm owns a lot of intellectual property, including patents, patent applications and trade secrets related to the CDMA technology. The company uses this technology in its own products while it also licenses these patents to other companies.

The company generates its revenues from selling integrated circuits or chipsets, software products and services that are used in mobile devices and in wireless networks, broadband gateway equipment, desktop computers, televisions and blu-ray players amongst numerous other products.


Average Recommendation: Buy Average Target Price: 76.21
Number of Ratings: 44 Current Quarters Estimate: 1.16
FY Report Date: 9 / 2013 Current Year's Estimate: 4.50
Last Quarter's Earnings: 1.26 Median PE on CY Estimate: 14.81
Year Ago Earnings: 3.72 Next Fiscal Year Estimate: 4.86
Median PE on Next FY Estimate: 13.68

The Chart

On Tuesday, the stock blasted to the top of its bull channel on the third continuation gap since Jan. 1, after announcing that it was raising its dividend by 40% to $0.35 a share. It also added a new $5 billion stock buyback program to replace a previous $4 billion plan. However, Wednesday and Thursday saw the stock settle back a bit, which allows us a good entry level.

Before long, traders can look forward to a break above last March’s high of $68.87 to the $78-$80 level. Longer-term investors could see much higher prices, even a break to the January 2000 high at $100, since this company is on an earnings tear that could exceed analysts’ estimates in every quarter in FY 2013-2014.


Market Cap (intraday)5:114.75B
Enterprise Value (Mar 8, 2013)3:101.30B
Trailing P/E (ttm, intraday):17.63
Forward P/E (fye Sep 30, 2014)1:13.74
PEG Ratio (5 yr expected)1:1.01
Price/Sales (ttm):5.60
Price/Book (mrq):3.24
Enterprise Value/Revenue (ttm)3:4.95
Enterprise Value/EBITDA (ttm)6:14.02

Areas of Expertise

Qualcomm essentially makes its money from two areas:-

• its licensing technology and

• the sale of wireless baseband chips.

And it’s strategically positioned itself to benefit in both these areas from the boom in smartphones. The competition's finding that this combination is very hard to beat -- leading market biggies like Apple, Samsung, and HTC choose Qualcomm’s chips.

Reliance on Concentrated Customers

95% of the company's revenues in 2012 were earned from international customers and licensees. This figure has remained approximately the same over the past three years. Customers in China, South Korea, and Taiwan, have generated 42%, 22% and 14% of Qualcomm's revenues in the year 2012. Over the past three years, Samsung Electronics, the South Korea based smart phone manufacturer has constituted more than 10% of revenues for Qualcomm.

Other big customers of the company are Hon Hai Precision Industry Ltd., Foxconn (FXCNF.PK) and Apple (AAPL). LG Electronics (LG) and HTC (HTCCY.OB) had together constituted more than 10% of the company's revenues in previous years.

However, all these companies represent leading manufacturers of mobile phones and since Qualcomm has major patents for the CDMA technology, it seems understandable that these small number of companies form major customers of the company.


In January, Qualcomm, reported its first-quarter results for the fiscal year 2013. The company not only surpassed the street's estimates, it even raised its guidance and targets for 2013. The revenue stood at $6.02 billion, which was up by 29% and 24% on yearly and quarterly basis respectively.

The net income of $1.9 billion for the fourth quarter, increased by around 36% year-on-year and by 50% quarter-on-quarter. Its net income growth actually blew off all its earlier reported positive numbers. These figures clearly depict that Qualcomm is benefiting from a huge demand of smartphones. Expecting this trend to continue in the future, the company increased its EPS guidance to $4.25-$4.45 from the previous range of $4.12-$4.32.

For fiscal year (FY) 2013, ending in September, the consensus estimate has been raised to $4.50 versus $3.71 in FY 2012. And expectations have been raised for FY 2014 to $4.86.


And now, it seems that QCOM will cruise through the rest of the year based on the fundamentals. The company posted a whopping 36% y-o-y rise in profits that beat analyst estimates by a long way. Revenue witnessed a similar 29% upsurge. But, what’s really reassuring about the company is that it has raised its guidance for the quarter, without being optimistic about an early relief from the current macro-economic headwinds. Increasing purchase of smartphones in emerging nations and an expected upsurge in its licensing revenue should be enough to do the job, the company feels, and it’s probably quite right in its assumptions. After all, not everyone can boast of a customer base that includes giants like Apple and Samsung. Not to mention the Blackberry BB10 newbies.

Qualcomm has played a smart hand and that’s why it should have a smooth ride, at least for the current year. On one hand, the company’s banking on more people in emerging nations acquiring smartphones (mostly powered by Qualcomm’s semiconductors), given the huge 3G penetration gap there. On the other hand, it knows that the spread of faster 4G LTE networks for developed nations would require a whole new generation of smartphones. That’s a win-win situation either way. Any production hiccups related to the new generation 28-nanometer chips that the company faced with its partner Taiwan Semiconductor Manufacturing Company have also been smoothed out by now. And the competition’s either lagging behind or venturing into other areas apart from mobile processors.

Qualcomm has the lowest P/E ratio of 17.94 and the highest P/S ratio of 5.60 as compared to the industry averages. This is mainly due to the high profit margins of around 32%, which is driven by its premium high-end products and the big clients in its portfolio. Another reason to love this stock is its improved guidance numbers from the management, which shows 2013 to be a better year for the shareholders. I feel, the stock will continue to gain the momentum until it is enjoying its supremacy in the market.

Dividend Payout Proves Reliability

One year ago QUALCOMM, Inc. (NASDAQ:QCOM) was boosting its dividend and repurchase program, and upping its quarterly payouts by 16%. That means it's that time of the year again: Time to return more cash to shareholders.

This time around, the company is boosting its dividend by an envious 40% to $0.35 per share quarterly, up from $0.25 per share quarterly. Notably, that's the biggest annual increase the company has announced in years. Over the previous four years, QUALCOMM, Inc. has increased its dividend payout by 6%, 12%, 13%, and 16%, in that order, so a 40% jump is quite generous indeed.

Qualcomm Inc. Board of Directors also approved a new $5.0 billion stock repurchase program to replace the prior $4.0 billion stock repurchase program, which had $2.5 billion of repurchase authority remaining.

When you talk about dividend signaling theory, the clear signal that management is sending to shareholders is that the business remains rock solid, despite intensifying competition from the likes of NVIDIA Corporation(NASDAQ: NVDA) and Broadcom Corporation (NASDAQ: BRCM), two companies looking to cut in on QUALCOMM, Inc.'s market share.

At the same time, investors will benefit from the bigger share repurchase program that replaces the existing $4 billion one, and shows the management's willingness to reinvest in the stock that is trading close to its all-time highs. The higher cash allocation to shareholders is due to the strong operating cash flows that Qualcomm has been generating over the past year. The company generated about $6 billion in operating cash flows in FY 2012, around 20% higher than the previous fiscal year.

Qualcomm has increased its dividend by 12%, 13%, 16% and 40% in the years 2010, 2011, 2012 and 2013 respectively. It further stated that it is replacing its old share repurchase plan with a new $5 billion share buyback plan. Looking at the company's past records, the company has returned approximately $20 billion through various stock repurchase and dividend plans. As of December 30, 2012, the company had cash and cash equivalents (including marketable securities) of approximately $13 billion and a healthy free cash flow of more than $1 billion in the last quarter (ended December 2012). These numbers not only present a very healthy financial position of the company, the dividend and buy-back policy also shows that the management of the company has confidence in the company's future.

Analysts Opinions

As a result of earnings, many analysts have raised their price objectives, which now stand at a median of $76.50, although S&P increased its target to $84.

Several investment firms have updated their stock ratings and price targets on shares of QUALCOMM (NASDAQ: QCOM) in the last week:

• QUALCOMM had its price target raised by analysts at FBR Capital from $76.00 to $79.00. They now have an “outperform” rating on the stock.

• QUALCOMM had its price target lowered by analysts at FBR Capital to $76.00.

• QUALCOMM had its “outperform” rating reaffirmed by analysts at BNP Paribas. They now have a $75.00 price target on the stock.

• QUALCOMM had its “buy” rating reaffirmed by analysts at Deutsche Bank. They now have a $78.00 price target on the stock. They wrote, “The week before the Mobile World Congress, Qualcomm made its announcement of the RF360 Front End Module (FEM). As we noted in our comments last week, this product line is a result of over five years of internal development at QCOM. The RF360 is expected to start shipping in two phones later this year. At MWC, we met with most of QCOM’s baseband competitors, several component suppliers, device vendors and industry contacts. Bottom line, we reiterate our Buy rating on QCOM.”

• QUALCOMM had its “buy” rating reaffirmed by analysts at Goldman Sachs. They now have a $80.00 price target on the stock. They wrote, “Qualcomm announced a 40% dividend increase, raising its quarterly dividend to $0.35 from $0.25, effective for dividends payable after March 27, 2013. Qualcomm also announced a $5.0bn stock repurchase program, replacing the prior $4.0bn stock repurchase program, of which $2.5bn was remaining. The new stock repurchase program has no expiration date.”

• QUALCOMM had its “buy” rating reaffirmed by analysts at Nomura. They now have a $75.00 price target on the stock.

Analyst Firms Making Recommendations



Being at the forefront of technology innovations happening in the 3G and 4G world, the mobile semiconductor giant has benefited from the burgeoning demand for smartphones and other mobile devices. The company's unique business model allows it to profit from not only the sale of its own brand Snapdragon chipsets, but also the higher margin licensing fees that it derives from the sale of all mobile devices that can connect to 3G/4G networks.

While Qualcomm gradually faces increasing competition in the chipset space from rivals such as Nvidia (NVDA), Broadcom (BRCM), and MediaTek, expect the company to continue to leverage its early 4G LTE lead to good effect, going forward. Simultaneously, the rapidly growing mobile market ensures that Qualcomm will continue to rake in a steady stream of high margin royalties well into the future.

As discussed above, this company’s got tons of reasons to feel confident. With Qualcomm always remaining a step ahead in the technology race, coupled with its very welcome trend of returning value to shareholders, this is one stock which will not let you down, not anywhere in the near term.

Therefore, based on the facts above the following options trade is recommended…..

**OPTION TRADE: Buy the QCOM Jul 2013 65.000 call (QCOM130720C00065000) at or under $4.40, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.00.

”Success is simple. Do what's right, the right way, at the right time.”

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Options traders win because they are successful.

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