“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, June 22, 2020

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – QUALCOMM, Inc. (NASDAQ:QCOM) Calls

Thursday, June 25, 2020

** OPTION TRADE: Buy QCOM SEPT 18 2020 95.000 CALLS at approximately $4.50.

Place a pre-determined sell at $9.00.

Also include a protective stop loss of $1.80.

Preamble.....

Headquartered in San Diego, QUALCOMM, Inc. (NASDAQ:QCOM), U.S. mobile chipset giant, IS Finally, after years of setbacks and obstacles, expected to see a sharp jump in EPS into 2021-22. The owner/manufacturer of many of the patents and semiconductors that make wireless communication possible, Qualcomm is a critical player in the world’s information-technology economy.

After the NXP Semiconductors merger fell apart (an effort to expand and diversify away from its cell phone and smartphone chip and license focus), the company has done an admirable job of redeploying its cash hoard into a monster share buyback. The company has been able to repurchase 25% of its outstanding shares since the end of 2015, with a sizable chunk of it acquired last year. The good news is the balance sheet remains quite strong and liquid after the buyback, while leveraging future operating results for the remaining owners.

Qualcomm has refocused its preparation for the new 5G wireless growth wave that began deployment in 2019. This back-to-basics approach should help the stock price to much stronger performance soon.

Well above-average expansion in Qualcomm revenues is projected by Wall Street vs. S&P 500 businesses in general. The 5G rollout is forecasted to cause a massive rise in new smartphone demand, as an upgrade cycle begins.

About QCOM......

QUALCOMM Incorporated designs, develops, manufactures, and markets digital communication products worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access, and other technologies for use in wireless voice and data communications, networking, application processing, multimedia, and global positioning system products.

Earnings…..

Qualcomm last released its earnings results on Wednesday, April 29th.

The wireless technology company reported $0.88 EPS for the quarter, topping the consensus estimate of $0.79 by $0.09. The company had revenue of $5.21 billion for the quarter, compared to analysts’ expectations of $5.04 billion. Qualcomm had a return on equity of 69.92% and a net margin of 16.36%.

The business’s revenue for the quarter was up 6.6% compared to the same quarter last year. During the same period in the previous year, the business posted $0.77 EPS.

As a group, equities research analysts expect that Qualcomm will post 3.08 EPS for the current year.

Financials.....

Qualcomm produces robust profit margins on each dollar in revenue, and superb returns on investment in the operating business. Not only are margins/returns extraordinarily high against most businesses in America, but readings on the upper end of the technology industry spectrum are incredibly desirable.

Gross profit margin is the highest in the major semiconductor producer space.

And after years of investment, operating issues and refocus efforts, Qualcomm’s net after-tax profit margin is set to rise toward the top of the heap into 2022-23.

Both the return on assets and cash flow to assets calculations are primed to climb even further for Qualcomm, as 5G is rolled out in 2020-21.

Despite expending billions on share buybacks, Qualcomm still retains a conservative, liquid and flexible balance sheet vs. the average S&P 500 business. At the end of March, the corporation held $10 billion in cash and another $5 billion in current assets, compared to an equity capitalization of $100 billion at $89 a share.

Influencing Factors.....

Qualcomm has experienced years of bad luck and setbacks that appear to be coming to an end.

After the coronavirus slowdown is complete, wireless 5G acceptance and product growth should propel results far into the future.

Qualcomm can be purchased at cheaper than historical valuations, heading into well-above normal operating growth.

High profit margins, a conservative balance sheet, a large share buyback leveraging upside, and a solid dividend story are worth consideration.

Last week Qualcomm announced a new processor, the Snapdragon 690 CPU chip for cheaper sub-$500 smartphones (a consumer price-point representing 50% of global phone sales) geared toward 5G network access. Experts believe the speed of 5G may encourage customers to use phone access as a replacement for cable TV subscriptions. If 5G does revolutionize wireless communication and internet access, Qualcomm’s piece of the pie could turn into an income bonanza!

Settling all disputes with Apple was a huge win for the company, as sales/income trends from one of its largest customers will remain intact.

Intel’s subsequent withdrawal from the immediate 5G chip market was also a positive, reducing competitive pressure, at least for a number of years.

Analysts Outlook…..

Wireless technology maker Qualcomm is a leader in mmWave RF and stands to benefit from global carriers that are requiring smartphones to support the technology as part of the 5G upgrade cycle, according to analyst Tal Liani of BofA Securities. Tal Liani maintains a Buy rating on Qualcomm's stock with a price target lifted from $100 to $115.

In addition to U.S. carriers requiring mmWave RF, countries like Japan and South Korea are ramping their mmWave deployment as well, Liani said in a Wednesday note.

Encouragingly, Qualcomm's management estimates its market share of the technology in 2020 stands at 100%, as it is the only vendor that offers an end-to-end, modem-to-antenna millimeter wave solution, the analyst said.

It is also the only RF vendor that can ship millimeter-wave solutions at large-scale production volumes, he said.

Qualcomm's exposure to Apple Inc. alone could result in an incremental $3 billion from the 5G iPhone launch, Liani said.

It is likely the iPhone 5G will use Qualcomm's RF solution, as its chip supply contract with Broadcom Inc  isn't exclusive, the analyst said.

Third-party data from Strategy Analytics suggest millimeter wave-capable handsets will represent 25% to 75% of all 5G handsets through 2024, according to BofA.

Assuming Qualcomm holds a monopoly on the market in 2021 and sees its market share drop to 50% through 2024, Qualcomm faces a cumulative $17-billion revenue opportunity, Liani said.

Also, Charles Lemonides, CEO of ValueWorks in New York said Qualcomm is being discounted by technology investors based on its “reasonable” valuation and growth prospects as 5G services and equipment is rolled out.

Analysts polled by FactSet expect Qualcomm’s sales for its fiscal 2020 ended Sept. 30 to total $20.8 billion, increasing 27% to $26.48 billion in fiscal 2021 and growing another 6% to $27.97 billion in fiscal 2022.

“That is real growth,” Lemonides said.

“They are the best at 5G. And at [a market capitalization of] $100 billion, they are looking cheap” to the projected $26.48 billion in sales in fiscal 2021, he said.

Lemonides predicted Qualcomm’s annual earnings would “go to $6 to $8 within a year and a half.” The company is expected by analysts to earn $3.68 a share in fiscal 2020, increasing to $5.80 in fiscal 2021 and $6.04 in fiscal 2022.

As well, reviewing QCOM shares for Morgan Stanley, analyst James Faucette upgrades the stock to Buy from Neutral, and supports his rating with a $102 price target. Faucette’s target implies a healthy upside of 13% for the stock.

In his comments on QCOM, Faucette writes, “We see smartphone demand improving through the year, with a rising average selling price as we transition to 5G; volumes down 30% y/y in 2q should be a good entry point as we see consumption rebounding quickly.”

And, Susquehanna analyst Christopher Rolland recently spoke to Qualcomm’s resident RF expert, to discuss an “often-misunderstood piece of Qualcomm’s business model.”

Qualcomm’s RF front end business – the components that turn the information into radio signals  – grew by 50% year-over-year in the first quarter. Rolland estimates the segment makes up 10% of Qualcomm’s overall business, amounting to what is now a run-rate of $600 million. Looking further down the line, in the long term, Qualcomm sees RF making up 20% of the company’s business.

The company has expanded its RF “revenue base” significantly, with recent technology advances in parts, such as power amplifiers, switches and antenna tuners.

“Qualcomm has defined the cutting-edge cellular standard by consistently ‘moving the goal posts’ in baseband capabilities for the last two decades. Every time a competitor matches Qualcomm’s technology, they quickly add important new ‘table-stakes’ features… We continue to believe the RF opportunity for Qualcomm is generally underappreciated by the Street” said Rolland.

And also, Rosenblatt analyst Kevin Cassidy is confident that the mainstream adoption of 5G is imminent and will be widespread, affirming that Qualcomm is strategically positioned to take full advantage of the trend for years to come.

Cassidt views 5G revolution as an essential driver for QCOM for several reasons, including its rapid adoption, extensive applications, and industry-breaking capabilities.

Above all, Cassidy envisions 5G technology being the quintessential growth driver in tech sector for what could be more than a decade.

Cassidy is confident that the long-term implications of 5G will work heavily in Qualcomm’s favor.

Rolland keeps a Buy rating on QCOM, and raises the price target from $95 to $105.

So…..

Qualcomm has a quick ratio of 1.39, a current ratio of 1.57 and a debt-to-equity ratio of 4.42. The firm’s 50-day simple moving average is $82.55 and its 200-day simple moving average is $81.75. QCOM has a one year low of $58.00 and a one year high of $96.17. The company has a market cap of $100.26 billion, a PE ratio of 26.00, a PEG ratio of 1.65 and a beta of 1.35.

In the end, once the coronavirus economic mess becomes less intrusive to operations and demand sometime in 2021, the final weight holding Qualcomm in check will be removed.

Already in 2019-20, Qualcomm is beginning to outperform the general stock market. Over the past 52 weeks, the stock quote has risen +20% faster than the S&P 500.


Option Trade – CVS Health Corp (NYSE:CVS) Calls

Monday, June 22, 2020

** OPTION TRADE: Buy CVS AUG 21 2020 67.500 CALLS at approximately $2.20 (Up to $2.50).

Place a pre-determined sell at $4.40.

Also include a protective stop loss of $0.90.

Preamble.....

CVS Health Corp (NYSE:CVS), formerly CVS Caremark Corporation, a pharmacy healthcare provider in the United States, holds immense promise after the company recently-introduced Health Care Benefits segment following the Aetna acquisition.

CVS Health has transformed itself into a leading healthcare provider company.

Its physical locations with integrated insurance and on-site primary care form a meaningful moat around the business.

Continued earnings and free cash flow growth ensures safety of the dividend and long-term debt reduction.

Within CVS Health’s Retail/LTC and Pharmacy Services segments, the coronavirus pandemic has resulted in greater use of 90-day prescriptions and early refills of maintenance medications. Further, there was improvement in front store volume within the Retail/LTC segment.

Also, the year-over-year improvement in the top line was fueled by strong growth in Pharmacy Services segment, which benefited from the upside in specialty services. CVS Health put up a robust performance with better-than-expected figures in the first quarter of 2020.

The Aetna Acquisition…..

CVS Health has been resilient to a changing landscape and whilst CVS Health was just drugstore chain CVS, it rarely qualified as a value name. Perhaps in response to Amazon’s PillPack acquisition in May 2018, CVS made a splash by acquiring insurance giant Aetna in late 2018, thereby transforming it into one the largest integrated healthcare companies in America. Along with Aetna came 33 million members on the medical, dental, and pharmacy benefit management (PBM) side, adding to the already robust PBM business that CVS had from the Caremark acquisition it did earlier.

This integrated model plays well into CVS Heath’s ambitions to become a leading healthcare company as its 9,900 current retail locations are within 3 miles of 70% of the U.S. population. By integrating the insurance business, CVS is able to reduce the cost of care for Aetna’s members while boosting profits to its bottom line at the same time.

And, much has changed since CVS acquired health insurer Aetna. Like most of its peers, Aetna was priced more like a value name, and the combined entity's stock appears to reflect its insurer side more so than the retailing side of its revenue mix. Its current forward-looking price-to-earnings (P/E) ratio is a modest 9.9.

MinuteClinics Rapid Growth…..

According to CVS Health’s June 2020 Investor presentation, the company experienced an impressive 600% YoY increase in utilization of telemedicine through its MinuteClinics even before the impacts of COVID in April and May. Eligible members receive services at MinuteClinics at no cost. This provides a strong competitive advantage and a moat to both the insurance and physical retail/healthcare locations as the integrated model gives it a low price advantage without necessarily sacrificing margins. Over time, an opportunity exists for CVS to convert its large store formats into HealthHUBs. By the end of 2021, the company expects to have 1,500 HealthHUB locations, which equates to 15% of its current physical footprint.

COVID-19 Effect…..

According to reports, COVID has accelerated the pace of millennials moving away from urban centers to suburbs, where most of CVS’s locations thrive. This is due to the higher infection rates of urban centers and the increased adoption of remote work that is expected to continue even after the pandemic eases.

Aging Population…..

The aging populating is another tailwind for healthcare companies like CVS Health. The fact that CVS saw a 1,000% increase in home delivery in the latest quarter, even before the brunt of COVID in April and May is important movement. This increased home delivery capacity undoubtedly helps CVS better serve a growing population of 65+ year old seniors, which is expected to reach 73 million, or just under 20% of the population, by the end of 2030.

National Healthcare Spending…..

According to CMS, national healthcare spend is projected to grow at an average rate of 5.5% per year through 2027 and reach an astounding $6.0 trillion by then. This puts healthcare spend on pace to grow at 0.8 percentage point faster than the US GDP, resulting in 1 in 5 dollars of the GDP being healthcare related within a decade. CVS, as a large integrated healthcare provider company, is in a prime position to benefit from this trend.

Earnings…..

CVS Health’s first-quarter 2020 adjusted earnings per share (EPS) of $1.91 increased 17.9% year over year and exceeded the Consensus Estimate by 17.2%. The adjusted EPS figure takes into account certain integration costs pertaining to the buyout of Aetna, asset amortization costs and storerationalization chargesalong with other adjustments.

On a reported basis, the company’s earnings of $1.53 per share improved 40.4% year over year.

Total revenues in the first quarter rose 8.3% year over year to $66.76 billion. The top line also beat the Consensus Estimate by 5.6%. The year-over-year revenue rise was primarily driven by strong underlying core growth across all segments.

**The company is scheduled to report its next quarterly earnings results on Wednesday, August 5th.

CVS is projected to report earnings of $1.78 per share, which would represent a year-over-year decline of 5.82%. Meanwhile, the Consensus Estimate for revenue is projecting net sales of $63.41 billion, down 0.03% from the year-ago period.

Looking at the full year, Consensus Estimates suggest analysts are expecting earnings of $7.05 per share and revenue of $263.79 billion. These totals would mark changes of -0.42% and +2.73%, respectively, from last year.

Outlook…..

CVS Health reiterated its 2020 adjusted EPS and cash flow guidance.

Adjusted EPS is expected in the band of $7.04-$7.17. The Consensus Estimate for 2020 earnings is pegged at $7.08.

The full-year operating cash flow guidance in the range of $10.5 billion-$11.0 billion remains unchanged as well.

However, the rest of the earlier-provided guidance has been withdrawn due to the significant variability in the impact of COVID-19 on the company’s business.

Financials.....

Looking into the financials, CVS is showing no signs of slowing down as free cash flow has grown at a solid clip, increasing 63% since 2015 to $9.00 per share for the trailing twelve months. Encouragingly, this is in spite of approximately 280 million new shares being issued in relation to the Aetna acquisition.

So far, the company has been aggressively paying down debt with excess free cash flow. Since 2018, long-term debt has been reduced by nearly $6 billion. In essence, if all of the debt related to the Aetna acquisition were paid down, then the debt-financed portion of the Aetna deal would be contributing to the EPS as free and clear of encumbrances on a going forward basis.

Analysts Outlook…..

Credit Suisse Group raised shares of CVS Health from a “neutral” rating to an “outperform” rating and set a $75.00 price target for the company in a report on Thursday, May 14th. They noted that the move was a valuation call.

Several other equities analysts have recently commented on the company…..

  • Robert W. Baird raised their target price on shares of CVS Health from $62.00 to $66.00 and gave the company a “neutral” rating in a research note on Thursday, May 7th.
  • Oppenheimer reissued a “hold” rating on shares of CVS Health in a research note on Wednesday, May 6th.
  • UBS Group lowered their price target on shares of CVS Health from $85.00 to $79.00 and set a “buy” rating for the company in a report on Thursday, May 7th.
  • Deutsche Bank lifted their price objective on shares of CVS Health from $97.00 to $109.00 and gave the stock a “buy” rating in a research note on Tuesday, February 18th.
  • SunTrust Banks dropped their price objective on shares of CVS Health from $90.00 to $80.00 and set a “buy” rating for the company in a research note on Monday, April 13th.
  • Finally, Morgan Stanley lifted their price objective on shares of CVS Health from $71.00 to $77.00 and gave the stock an “overweight” rating in a research note on Thursday, May 7th.

 One analyst has rated the stock with a sell rating, two have given a hold rating, fourteen have assigned a buy rating and two have issued a strong buy rating to the stock. The company presently has an average rating of “Buy” and an average price target of $80.88.

So…..

CVS Health is a combination of a drugstore chain, health insurer, and pharmacy benefits management business that just works.

CVS Health is way ahead of the game, as it has and continues to transform itself into a leading healthcare provider company. Its growing base of MinuteClinics and HealthHubs with Aetna integration maximizes the usage of its physical locations and helps it to form a meaningful moat around the business. In addition, CVS’s growing digital presence through Telemedicine and at-home delivery of drugs and healthcare supplies shows that management has the right strategy in place as it adapts to a changing healthcare landscape.

Shares seem to be highly undervalued at the current price of $64.41 and a PE ratio of 9.1.

CVS has a debt-to-equity ratio of 1.29, a current ratio of 0.99 and a quick ratio of 0.70. The stock has a market cap of $84.29 billion, a PE ratio of 11.68, and a price-to-earnings-growth ratio of 1.44 and a beta of 0.75. CVS Health Corp has a twelve month low of $52.04 and a twelve month high of $77.03. The firm’s 50 day moving average price is $64.16 and its 200 day moving average price is $66.61.