Wednesday, March 4, 2009

Marcial: Qualcomm, a Rare Tech Haven?

Marcial: Qualcomm, a Rare Tech Haven?

In these paralyzing days of plunging stock prices and corporate spending cutbacks, fearful investors are anxiously waiting for the market meltdown to end.

So when Qualcomm (QCOM) announced on Mar. 3 that it was hiking its quarterly dividend—yes, a company boosting its payout while other firms slash theirs—the unlikely news came as a blast of fresh air. Shares of Qualcomm, the leading maker of wireless products based on its CDMA (code division multiple access) technology, bounced that day to 33.67 a share from a closing price of 32.79 on Mar. 2, the day the Dow Jones industrial average sunk to an 11-year closing low of 6,726.02. The number of corporations, including behemoths like General Electric (GE), that have cut their dividends has been growing as firms scramble to preserve cash and reduce losses.

3G Revenue Potential

Although Qualcomm's stock is still well below its 52-week high of 56.88 reached on Aug. 15, 2008, it is one of the few tech stocks that has risen in the past five months, up from a 52-week low of 28.16. When Qualcomm was last featured in this column, the shares were trading at 48.

The dividend news and the stock's recent steady rise has provided comfort to Wall Street analysts who have remained upbeat about Qualcomm even amid the dismal performance of the market and other tech stocks. Of the 32 analysts who follow Qualcomm, 22 recommend buying the stock, nine peg it a hold, and one rates it a sell, according to data from Bloomberg.

"We believe Qualcomm is well positioned to weather an economic downturn," says Tom Carpenter, senior technology analyst at investment firm Hilliard Lyons , who rates the stock a long-term buy. The company will likely continue to generate strong cash flow, notes the analyst, who has a 12-month target price of 46.

Qualcomm had a $9 billion cash hoard as of the end of its December fiscal quarter, according to data provider Capital IQ.

The company stands to benefit from wider adoption of the next-generation 3G wireless standard. Qualcomm earns a royalty of $4 to $8 each time a 3G phone is sold—$4 from Nokia (NOK) and $8 from most other customers that use Qualcomm's chipsets, based on the current average selling price of $200 for a 3G handset.

"We project 3G phones will increase their percentage of the world's cell-phone mix from today's 40% to 70% in 2012," says Carpenter. This will mean hundreds of millions of dollars of profitable incremental revenue for Qualcomm, he points out, based on the company's 85% operating margin.

Teaming Up with Nokia

He notes, however, that mobile-phone sales are slowing worldwide and phone companies are cutting back on inventory to offset lower sales, which could weigh on Qualcomm's near-term outlook. Fewer mobile phones in inventory mean fewer phones that contain Qualcomm's chipsets. Nonetheless, Qualcomm appears to be increasing its market share of chipset production, with new customers Nokia, Research in Motion (RIMM), and Motorola (MOT) either producing or scheduled to produce phones with Qualcomm's chips, says Carpenter.

Former rivals Nokia and Qualcomm agreed in February to co-develop next-generation cell phones aimed at the U.S. market. The new phones are expected to make their debut in mid-2010. The two companies resolved a protracted litigation last year in which Nokia agreed to pay royalties to Qualcomm to settle a dispute. Nokia has about 40% of the global market but has been weak in the U.S.

"We view the [joint venture] announcement as a positive for Qualcomm, as it further solidifies the company's leadership in 3G technologies and presents an opportunity for growing its market," says analyst Maynard Um of investment bank UBS (UBS). He rates the stock a buy with a 12-month target of 45.

Anil Doradla, tech analyst at investment firm William Blair , says the focus of the Nokia-Qualcomm plan will be on the high-end smartphone market. He rates Qualcomm outperform, in part based on projected earnings of $1.75 a share for its 2009 fiscal year ending on Sept. 30, and $2.04 for fiscal 2010.

Many investors are now scouting for companies with strong balance sheets that generate sizable cash flows. Qualcomm fits the bill, and offers some exciting new products to boot. Those factors make it one of the most appealing plays in tech right now.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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