ModernGraham Valuation: Qualcomm Inc. (QCOM)

moneyCompany Profile (obtained from Google Finance): QUALCOMM Incorporated (Qualcomm) is engaged in designing and manufacturing of 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. Effective July 4, 2013, Bharti Airtel Ltd raised its interest to 51% from 49% by acquiring a 2% interest in Qualcomm India Pvt Ltd, from Qualcomm Inc. In November 2013, the Company sold its subsidiary, Omnitracs, Inc to Vista Equity Partners.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $114.88
MG Opinion Undervalued
Value Based on 3% Growth $43.27
Value Based on 0% Growth $25.36
Market Implied Growth Rate 8.12%
Net Current Asset Value (NCAV) $6.01
PEmg 24.73
Current Ratio 3.75
PB Ratio 3.45

Balance Sheet – 9/30/2013 

Current Assets $19,555,000,000
Current Liabilities $5,213,000,000
Total Debt $0
Total Assets $45,516,000,000
Intangible Assets $6,529,000,000
Total Liabilities $9,428,000,000
Outstanding Shares 1,685,000,000

Earnings Per Share

2013 $3.91
2012 $3.06
2011 $2.70
2010 $1.96
2009 $0.95
2008 $1.90
2007 $1.95
2006 $1.44
2005 $1.26
2004 $1.03
2003 $0.63
2002 $0.32

Earnings Per Share – Modern Graham 

2013 $2.98
2012 $2.39
2011 $2.00
2010 $1.64
2009 $1.49
2008 $1.68

Conclusion:

Qualcomm Inc. is a very attractive company at a great price.  The company nearly qualifies for the Defensive Investor, but fails due to a high PEmg ratio and a high PB ratio.  However, the company passes all of the five requirements of the Enterprising Investor due in large part to its excellent financial position and its strong earnings history.  Enterprising Investors should feel comfortable proceeding with further research, beginning with a review of the ModernGraham Valuation of Intel Corporation (INTC).  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.68 in 2008 to $2.98 in 2013.  This proven level of growth easily supports the market’s implied growth rate of 8.12% and the company would therefore appear to be undervalued at the current time.

What do you think?  Do you agree that Qualcomm Inc. is undervalued?  What would be your assessment?  Is the company suitable only for and Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Qualcomm Inc. (QCOM) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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