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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


March 12th 2015

Nasdaq Symbol: QCOM
Industry: Semiconductors
Price as of 3/12: $69.37


A couple 300 point down days certainly got investors' attention this past week.  We know the first quarter earnings will be lousy for the energy sector. I wouldn't be surprised to see a number of preannouncements in the coming weeks. The recent currency volatility is adding more uncertainty to the markets. The upward trend in the US dollar will cause a number of multinational companies to miss their first quarter earnings estimates. Having said that, the markets may see a nice bounce in April, but then further downside into the summer months. It's still tough to find good value in the markets. The financials are performing well after positive stress test results. Many of the large multinational banks are now allowed to hike their dividends and increase their share buybacks. The technology sector has remained strong thanks in large part to Apple. In the semiconductor space, a number of chip names have come under pressure. Intel is down 4% today after lowering guidance. If Intel drops any more it may be a good buy. Today we'll highlight another chip company that preannounced in January. The stock of the week is Qualcomm. The Nasdaq hit 5000 last week first time since 2000. Back then Qualcomm was a tech darling thanks to their cellphone chips. Their stock took a hit after the tech bubble, but the fundamentals have only improved. In the short term, Qualcomm is facing a sales slowdown, but longer term the fundamentals remain strong. Just this week, Qualcomm boosted their dividend 14% and increased their share buyback to $15 billion which equates to 13% of their market cap. The stock may remain under pressure for a while longer, but longer term thanks to the share buyback and improving fundamentals, Qualcomm looks like a good pick.

Back at the end of January, Qualcomm reported strong fourth quarter earnings beating estimates by 9 cents a share as revenue rose 7.2% year over year to $7.1 billion. However the stock dropped over 12% to a 52 week low due to lower guidance for the current quarter and the full year.  Growing global market share gains for the rival Apple iphone, Samsung moving away from Qualcomm's Snapdragon 810 processor and increased competitive landscape in China caused Qualcomm to lower earnings and sales estimates for the full year. But the news for Qualcomm has improved since then. First, Qualcomm resolved a suit with China's NDRC, including a one-time $975M fine and modified business practices resolving a major overhang for the stock. Second, Qualcomm is losing business to Samsung with their Snapdragon 820 processor, but the company remains strong thanks to their LTE smartphone growth in China and an improving mix of 5-mode and even 6-mode smartphones. Going forward the new Snapdragon 820 processor will help Qualcomm offer more differentiation with improved performance for the premium tier smartphone market versus its current offering and could potentially enable co to win back some share in Samsung's premium tier Galaxy series in 2016. Investors will a more long term focus have been snapping up the stock.

Even with the recent rebound, Qualcomm still trades for 14 times current year earnings and 12 times 2016 earnings. The stock also trades for 4 times sales, but the best part of the company is the balance sheet. Currently, Qualcomm has $31 billion in cash, cash equivalents and short term investments. Their long term debt is zero. With interest rates as low as they are, numerous other companies like Microsoft and Intel have leveraged their balance sheets to buy back stock. Qualcomm is now joining this group which should reward shareholders. Brean Capital recently upgraded Qualcomm with a target of $87 a share. Canaccord Genuity also raised their price target to $87. In the short term, Qualcomm's stock may remain under pressure, but longer term with improving fundamentals, a large share buyback and a dividend yield of 2.7%, should reward shareholders handsomely.