Applied Portfolio Management Analyst: Breanna Short QCOM ... · Applied Portfolio Management Analyst: Breanna Short Report Date: 5/5/2013 Market Cap (mm) $111,953 Annual Dividend

Applied Portfolio Management Analyst: Breanna Short

Report Date: 5/5/2013

Market Cap (mm) $111,953 Annual Dividend $0.97 2-Yr Beta (S&P 500 Index) 1.08

Return on Capital 76.3% Dividend Yield 1.5% Annualized Alpha 10.3% Compared With:

EPS (ttm) $3.88 Price/Earnings (ttm) 16.8 Institutional Ownership 5.7% Intel Corporation

Current Price $65.16 Economic Value-Added (ttm) $4,074 Short Interest (% of Shares) 0.9% Cisco Systems, Inc.

12-mo. Target Price $76.00 Free Cash Flow Margin 24.7% Days to Cover Short 1.3 and the S&P 500 Index

Business Description

Total Revenue 22.6% Free Cash Flow 1.0%

EBIT 17.4% Total Invested Capital 5.7%

NOPAT 20.5% Total Assets 16.2%

Earnings Per Share 55.2% Economic Value-Added 23.3%

Dividends Per Share 12.1% Market Value-Added 15.2%

2008 2009 2010 2011 2012

33.6% 34.2% 33.9% 34.4% 30.1%

19.4% 61.7% 23.5% 28.8% 24.7%

4.9% 2.2% 3.7% 3.8% 5.5%

1.5% 1.5% 1.4% 1.2% 1.4%

2008 2009 2010 2011 2012

1.94 0.96 1.98 2.57 3.59

0.60 0.66 0.72 0.81 0.93

1.89 1.60 1.69 2.48 2.73

(0.13) 3.17 1.20 1.94 3.18

Datasource: Capital IQ

Margins and Yields

Operating Margin

Per Share Metrics

Earnings

NOPAT

Free Cash Flow

Dividends

Free Cash Flow Margin

Earnings Yield

Dividend Yield

QUALCOMM Incorporated designs, develops, manufactures, and markets

digital telecommunications products and services. It operates in four

segments: QCT, QTL, QWI, and QSI. The QCT segment develops and

supplies integrated circuits and system software based on code division

multiple access (CDMA), orthogonal frequency division multiple access

(OFDMA), and other technologies for use in voice and data

communications, networking, application processing, multimedia, and

global positioning systems. The QTL segment grants licenses to use

portions of its intellectual property portfolio, which includes patent rights

useful in the manufacture and sale of various wireless products, such as

Investment Thesis

ANNUALIZED 3-YEAR CAGR

QCOM has maintained a superior position within the communications

equipment industry through its patented technologies that are

incorporated into almost every smartphone. Consequently, QCOM has

consistently generated strong free cash flows, with a superior ROIC of

76% for 2012. Despite a low dividend yield, dividends have grown each

year, with a 5-year CAGR of 15% and expected growth rates in the

double-digits. Furthermore, QCOM's rising earnings yield indicates the

stock price has become a better value to investors. Using a

conservative forecasting approach, QCOM is currently under-valued in

the market, based on the present value of FCF. The Dividend Discount

Model also depicts that 40% of QCOM's stock price is based on

dividends.

QUALCOMM Incorporated Sector: Information Technology BUYQCOM

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%QCOM ^SPX

-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%

QCOM INTC NASDAQGS:CSCO

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012

Price/Earnings Price/Free Cash Flow

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2007 2008 2009 2010 2011 2012

EBIT Net Operating Profit After Tax

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000$90,000

$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500

2007 2008 2009 2010 2011 2012

Economic Value-Added Market Valued-Added

0%10%20%30%40%50%60%70%80%90%

2007 2008 2009 2010 2011 2012

ROA ROE ROIC

Student Investment Fund Stock Report

Qualcomm, Inc.

NASDAQ: QCOM

Analyst: Breanna Short

Investment Thesis

QCOM has consistently generated strong and growing free cash flows.

Operating and free cash flow margins exceed the industry averages and those of QCOM's

key competitors.

Dividends have grown year-over-year since 2003, with a 5-year CAGR of 15%, and are

expected to continue growing at double-digit rates for several years.

QCOM's ROIC has consistently been above 40% for the previous three years, reaching

76% in 2012.

QCOM has a superior competitive position in the mobile computing and communication

market, the fastest- and most reliably-growing segment of the information technology

sector

QCOM's undervaluation (based on a discounted FCF model), combined with superior

expected growth rates, presents a good opportunity for the Student Investment Fund.

Highlights

Management expects sizable growth in the 3G/4G mobile markets and has stated that

new mobile advances will sustain their leadership within the industry.

Analysts from S&P's Capital IQ project a 27% growth rate in 2013.

QCOM’s earnings yield has risen at a solid pace, reported at 5.5% for 2012, indicating

earnings fundamentals have grown faster than the stock price. Thus, QCOM’s price has

increasingly become a better value to investors.

QCOM has fully funded their investments with equity in three of the past five years,

demonstrating its superior financial structure.

A $5 billion share repurchase program was just recently approved, which will further

boost the per share intrinsic value of the stock.

According to the annual report, management expects to increase dividends by 40% in

2013 in order to reach a dividend yield of approximately 2.0%.

Macroeconomic Exposure

Despite a relatively weak economic outlook, QCOM has positioned itself financially to continue

thriving worldwide. A strong cash position and dominant financial results adds to the company’s

ability to sustain another economic slowdown. Furthermore, as QCOM’s products transition

from consumer discretionary items to a consumer staple, the company will be largely unaffected

by low consumer sentiment and will continue to experience growing sales, although possibly at a

slower pace. The proven track record of innovation at QCOM, coupled with increasingly high

consumer demand, safeguards QCOM from weak economic conditions to a large degree.


Qualcomm, Inc.

NASDAQ: QCOM


International Exposure

Headquartered in San Diego, CA, QCOM has established an international presence, with 157

locations around the world. The majority of QCOM’s operations are conducted in the US, China,

South Korea, and Taiwan, with a sizable amount of growth coming from China. From 2010 to

2012, revenues in China grew from $3.2 billion to $8.0 billion. Additionally, as of 9/30/12,

QCOM's sales in China represented 47.2% of the company's total revenue. Broad international

exposure has provided QCOM with high growth prospects.

1-Year Returns

QCOM's stock price has surged upward since July 2012, while INTC has experienced a steep

downtrend in returns. The marked increase in returns is likely attributable to QCOM’s alliance

with Samsung to develop wireless charging technologies and the company’s dominance in

graphics processing unit (GPU) shipments. It should also be noted that QCOM has surpassed

INTC in total market share of GPU shipments in recent years. (However, both INTC's and

MSFT's have rebounded in Mar-Apr 2013, another positive for the SIF, as these positions make

up 10.0% of the Fund's holdings.) For almost the entire time period covered in the graphs below,

QCOM has generated lower returns to its stockholders than the S&P 500. However, this may not

be entirely viewed as a negative aspect of QCOM, as it suggests that the market has not fully

realized the high level of intrinsic value of the stock, as evidenced by QCOM's high earnings

yield of 5.5%. QCOM has only recently begun to pay a dividend, which they have grown

consistently (5-year CAGR = 12.3%). Based on this history, and additional analysis presented

below, we believe this is a good time to initiate a long-term buy and hold position in QCOM.


Qualcomm, Inc.

NASDAQ: QCOM


Technological Developments

Game-changing alliances with a few of the most popular mobile device manufacturers have

strengthened QCOM’s competitive position within the industry. The main driver behind the

development of these high-profile alliances stem from the creation of the Snapdragon Processor

600. Samsung, HTC, and LG have all significantly increased their adoption of the Snapdragon

Processor 600. Moreover, QCOM has established a strong presence with Apple's iPhone 5, via

an indirect alliance with Samsung. Although Samsung manufactures the processor used in the

iPhone 5, Samsung's processor is almost fully equipped with QCOM technologies. The

Snapdragon Processor 600 is able to offer top-rated performance, while simultaneously

increasing the life of each charge. Even more impressive is the processor’s even greater support

for 4G long-term evolution (LTE). All of these factors have created such high demand for

QCOM’s products that demand has recently exceeded supply. QCOM's management is currently

sourcing additional manufacturers to meet this demand. It should also be noted that in the most

recent year, QCOM’s Snapdragon Processor shipments have increased 70%. Overall, QCOM’s

product line, which also includes CDMA and OFDMA technologies, has provided the company

with a strong position within the growing 4G mobile technology market.

Market Share

Within the information technology sector, QCOM’s main competitor is INTC. Both INTC and

QCOM produce processing chips and are therefore direct rivals.

As seen from the table above, QCOM has increased its market share at INTC's expense.

QCOM’s overall share of the two-firm market has grown 7.6%, with INTC's decreasing by the

same percentage. INTC’s declining market share is primarily attributable to its heavy revenue

concentration in PC sales. QCOM more actively focuses on the growing mobile market,

contributing to its ability to gain market share from INTC and other competitors.


Qualcomm, Inc.

NASDAQ: QCOM


On an absolute basis, INTC generates approximately $53 billion in sales revenue, while QCOM

generates $19 billion. Although QCOM has lower total revenue, they have experienced much

faster growth in sales, gaining on INTC’s market share year-by-year. On a per-share basis,

QCOM has outperformed INTC in generating revenue as evidenced in the above table. In

addition to a growing sales base, QCOM’s ability to consistently maintain an operating margin

above 30% has provided QCOM with a competitive edge, considering the industry average is

approximately 22%. Despite a high rate of growth in revenue and superior operating margin,

some competitors, such as INTC, have only been able to provide investors with a higher

dividend yield. As noted in the chart below, QCOM’s dividend yield of 1.43% is far below that

of its competitor INTC. Overall, though, the ability to generate a healthy ROIC resides with

QCOM, compared to INTC. Evidenced by the above table, QCOM provides an ROIC of over

75%, which is relatively unheard of within the industry. The fact that QCOM's ROIC remains so

high points towards their superior competitive position in the industry, as higher competitive

rivalry is almost always accompanied by compression in ROIC.

Modeling Assumptions

The valuation of QCOM was performed using modeling assumptions that were conservative, yet

realistic. The overall intrinsic value of the communications equipment company is estimated

using a variety of approaches. A discounted free cash flow model based on a 5-year forecast

generated an intrinsic value of $76.50, which indicates QCOM is currently under-valued by

17.4%. The modeling assumptions and intrinsic value estimates are further explained below.

Income Statement Inputs

Revenue Growth: In the 2009 fiscal period, QCOM’s revenue experienced negative

growth of 6.8%, due to the economic recession stemming from the 2008 financial crisis.

QCOM was able to recover from this decline in revenue, with growth of 5.7% in 2010. In

years 2011 and 2012, QCOM restored its ability to grow revenues at a pace above 25%.

Significant revenue growth in both 2011 and 2012 were due in large part to QCOM's

strategic alliances, specifically with Samsung, and overall increases in consumer demand

for faster, but smaller mobile devices. The 5-year revenue CAGR equals 16.6%.

Estimates for expected future revenue growth remain much higher, fluctuating around

30% for 2013. To remain conservative, yet realistic, a growth rate of 24% was chosen for

fiscal year 2013. From 2013 to 2017, the revenue growth rate was tapered down to a

sustainable growth rate of 3.0% for the long-term.


Qualcomm, Inc.

NASDAQ: QCOM


Gross Margin: Throughout the time frame from 2008 to 2012, QCOM was able to

maintain a healthy gross margin despite an economic downturn. The 5-year average of

68.1% was used to forecast years 2013 to 2017, based on the stability of this metric.

Operating Margin: QCOM's historical operating margins consistently exceed the

industry average. Due to the lack of volatility within the years 2008 until 2012, the 5-year

average of 33.2% appears to be representative of future performance and will, therefore,

be used as the pro forma operating margin.

Net Profit Margin: Similar to revenue growth, net profit margin experienced a profound

decline in 2009, falling to 15.3%. Post-recession, QCOM demonstrated its ability to

recover and has maintained an average net profit margin of 30.0% for the years 2010 to

2012. Rather than including 2009 operating results in the average, the average of 30.0%

from the previous three years was used in the forecasts to more realistically depict

QCOM's future profitability.

Common Shares Growth: QCOM announced on 3/15/13 a new share repurchase

authorization of $5.0 billion. This share repurchase program will replace an already

existing program of $4.0 billion in repurchases, with $2.5 billion remaining to be

repurchased. To maintain a conservative approach, common shares growth was adjusted

to −0.5%, which modestly accounts for the share repurchase program.

Dividend Growth: In 2003, QCOM issued its first dividend (a meager $0.09). Since

then, the dividend has increased every year, demonstrating management’s commitment to

growing dividends and confidence in its business model. The 5-year CAGR for dividends

was approximately 12.3%. In the first quarter of 2013, QCOM declared a 40% increase in

the quarterly dividend, and an expected 34.02% increase in the annual dividend.

Consequently, the 34.02% dividend growth rate was used for the 2013 projection. From

2014 until 2017, the dividend growth rate was slowly reduced on an annual basis to a

sustainable 3.0% long-term growth rate.


Qualcomm, Inc.

NASDAQ: QCOM


Financial Analysis

Total Debt-to-Assets: Only in years 2010

and 2011 has QCOM funded its

investment opportunities with $1 billion in

short-term debt. The sudden increase in

debt was in response to a purchase of

Atheros, a Wi-Fi chipmaker. In all other

years, excluding 2010 and 2011, QCOM

has utilized equity alone in its capital

structure. QCOM’s ability to fund its

investments with equity alone provides a

dominant competitive position in the

market, and demonstrates the company’s ability to generate high margins without leverage.

ROE, ROA, and ROIC: After the weak

financial performance noted in 2009

primarily due to a negative economic

environment, both ROA and ROE

remained relatively stable in 2010 and

2011, with modest expansion. However, in

2012, both the ROA and ROE experienced

a moderate jump, with ROA and ROE

increasing by 250bps and 240bps,

respectively. These metrics continue to

climb toward pre-recession levels.

QCOM’s ability to sustain a superior ROIC is characterized by an ROIC of 76.3% for the most

recent time period. The upward trend in ROIC has outperformed the pre-recession levels and is

indicative of QCOM’s outstanding ability to generate FCF.


Qualcomm, Inc.

NASDAQ: QCOM


Earnings Yield and Dividend Yield: Consistent with sharp increases in ROE and

ROE, the earnings yield has also experienced

a large jump in the most recent period to a

yield of 5.5%. The earnings yield took a hit in

2009, but has made a promising recovery.

QCOM’s dividend yield, on the other hand,

has remained relatively low year-over-year,

ranging from 1.2% to 1.5% throughout the

five-year period. As of 12/31/2012, the

dividend yield was at 1.4% and is not expected to significantly increase in the near-term, despite

high dividend growth rates. Although the dividend yield remains lower than desired for the SIF,

attractive relative valuation based on QCOM's earnings yield is more of a primary driver for the

buy recommendation. The company has demonstrated its ability and willingness to growth the

dividend, as noted previously, so future expansion of the dividend yield is also likely.

Net Fixed Assets and Total Invested

Capital: The majority of total invested

capital is comprised of net working capital,

which demonstrates the relatively low fixed

asset requirement for QCOM. In 2008, total

invested capital peaked at $7.7 billion and

then decreased dramatically in 2009 to $5.1

billion, demonstrating the effects of the

financial recession. Since 2009, QCOM has

increased its total invested capital, until

2012 when a slight decrease was noted.


Qualcomm, Inc.

NASDAQ: QCOM


NOPAT and FCF: In 2008, QCOM

generated a large NOPAT, but, due to high

capital expenditures, FCF fell to a negative

level. Because QCOM scaled back their

capital expenditures in response to the

economic uncertainty falling the recession,

FCF jumped sporadically in 2009. 2010

marked QCOM’s first year of recovery

with NOPAT and FCF returning to a

relatively normal, yet lower level. Since

2010, both NOPAT and FCF have

experienced upward trends and are

expected to remain trending upward as

QCOM maintains its ability to operate efficiently.

EVA and MVA: EVA remained relatively

stable from 2007 until 2010 fluctuating

around an average of $2.25 billion. In 2011,

QCOM’s EVA jumped to $3.5 billion, which

appears to be reflective of substantial growth

within the company’s technologies,

specifically those centered in the

advancement to 3G/4G LTE. Similarly, 2012

experienced another jump in EVA further

demonstrating QCOM’s superior ability to

generate an outstanding ROIC. MVA has also trended upward with EVA, up until 2012 when it

experienced a short dip downward.


Qualcomm, Inc.

NASDAQ: QCOM


Value Spread: One of the major

contributions to evaluating value creation is

determining the ROIC to WACC spread. As

of 2012, QCOM generated an ROIC of

76.3% with a corresponding WACC of 9.3%,

resulting in a spread equal to 67%. This

enormously growing spread between the

ROIC and the WACC is a huge positive

component of QCOM’s evaluation. As

QCOM continues to generate greater

NOPAT, with funding consisting only of equity, this value spread is expected to widen even

further.

WACC Assumptions: A WACC of 9.0% was

calculated based on:

A long-term growth rate of 3.0%,

consistent with the revenue long-term rate

And a cost of equity at 9.0%, with

components consisting of:

Risk-free rate of 2.0%

Market risk premium of 7.0%, and

A risk-adjusted beta of 1.00.


Qualcomm, Inc.

NASDAQ: QCOM


Intrinsic Valuation Model

As of 2012, QCOM’s computed intrinsic value approximated to $76.50, leading to the overall

conclusion that the company is currently under-valued in the market. From $76.50 in 2012, the

intrinsic value of QCOM is expected to grow to reach $100.67 in 2017. This forecasted price

trajectory is based on relatively conservative growth estimates in revenue and operating margin.

It should also be noted that the intrinsic value is expected to grow year-over-year from 2013 to

2017. The company’s ability to consistently generate operating profit margins above 30.0% is

the primary factor contributing to QCOM’s significant under-valuation in the market.


Qualcomm, Inc.

NASDAQ: QCOM


Dividend Discount Model

Given QCOM’s relatively low dividend yield, it is not surprising that QCOM registers as over-

valued based on a model that only takes dividends into account. Maintaining dividend growth

rates consistent with those in the forecasting section of the analysis and smoothing the beta to

1.00, QCOM’s value based on future dividends alone is $25.91. With a current market price of

$65.16, approximately 40% of QCOM's stock price is supported by the present value of a

conservatively-estimated future stream of dividends. QCOM’s valuation based on the dividend

discount model is not expected to increase in the future, given relatively low, yet growing

dividends.


Qualcomm, Inc.

NASDAQ: QCOM


Recommendation Summary

As evidenced in the chart below, QCOM is under-valued compared to the present value of FCF,

yet over-valued when comparing to the dividend discount model.

Despite a relatively low dividend yield, QCOM is expected to benefit considerably from

the increasing demand in mobile technology devices for which they provide components.

Based on the present value of FCFs, QCOM is under-valued, which results in future

capital appreciation that is likely to be recognized.

Comparing QCOM’s current stock price to fundamentals such as earnings and FCF, the

company is consistently under-valued.

The macroeconomic outlook created by the Applied Portfolio Management class

indicated a mild to moderate economic slow-down expected to occur within the next

year. QCOM will be able to sustain growth through this economic slow-down, primarily

due to the growing demand to be “connected”. Additionally, once the national economy

inevitably recovers, QCOM's stock will likely re-appreciate in the market closer to its fair

intrinsic value, providing the potential for sizable capital gains.

For all of these reasons, we rate QCOM as a BUY.

QCOM QUALCOMM Incorporated Sector Information Technology Report Date 5/5/2013 2007

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Total Revenue 8,871 11,142 10,387 10,982 14,957 19,121 23,710 28,452 32,720 35,010 36,061

Gross Profit 6,190 7,728 7,362 7,681 10,080 12,025 16,145 19,374 22,280 23,839 24,554

Operating Income 2,893 3,744 3,555 3,727 5,140 5,759 7,884 9,460 10,879 11,641 11,990

Net Income 3,303 3,160 1,592 3,247 4,260 6,109 7,113 8,535 9,816 10,503 10,818

Retained Earnings 8,541 10,717 11,235 13,305 16,204 20,701 25,706 31,724 38,784 46,408 54,276

Total Common Shares 1,660 1,632 1,656 1,643 1,658 1,700 1,692 1,683 1,675 1,666 1,658

Total Diluted Shares 1,693 1,660 1,673 1,658 1,691 1,741 1,732 1,724 1,715 1,706 1,698

Earnings Per Share $1.99 $1.94 $0.96 $1.98 $2.57 $3.59 $4.21 $5.07 $5.86 $6.30 $6.52

Dividends Per Share $0.52 $0.60 $0.66 $0.72 $0.81 $0.93 $1.25 $1.50 $1.65 $1.73 $1.78

2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Cash and Equivalents 2,411 1,840 2,717 3,547 5,462 3,807 6,231 7,477 8,599 9,201 9,477

Total Receivables 715 4,187 700 730 993 1,459 1,639 1,967 2,262 2,421 2,493

Inventory 469 521 453 528 765 1,030 1,155 1,385 1,593 1,705 1,756

Total Current Assets 8,821 11,872 12,570 12,133 14,293 15,645 24,442 29,330 33,730 36,091 37,173

Net PPE 1,788 2,162 2,387 2,373 2,414 2,851 4,507 5,408 6,220 6,655 6,855

Total Assets 18,495 24,712 27,445 30,572 36,422 43,012 58,462 70,155 80,678 86,325 88,915

Payables and Accruals 946 976 1,116 1,231 2,793 3,069 3,103 3,724 4,282 4,582 4,719

Total Current Liabilities 2,258 2,440 2,813 5,468 5,289 5,302 7,675 9,211 10,592 11,334 11,674

Total Debt 0 0 0 1,086 994 0 237 285 327 350 361

Total Equity 15,835 17,944 20,316 20,858 26,972 33,545 42,789 51,346 59,048 63,182 65,077

Historical Income Statement Highlights Forecasted Income Statement Highlights

Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Total Revenue

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Net Income

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Total Current Assets Cash and Equivalents

0

200

400

600

800

1,000

1,200

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Total Equity Total Debt

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Earnings Per Share Dividends Per Share

$0

$20,000

$40,000

$60,000

$80,000

$100,000

Total Assets Net PPE

QCOM-Report-05.05.13. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5 Analyst: Breanna Short

Margins 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Gross Profit Margin 69.8% 69.4% 70.9% 69.9% 67.4% 62.9% 68.1% 68.1% 68.1% 68.1% 68.1%

Operating Profit Margin 32.6% 33.6% 34.2% 33.9% 34.4% 30.1% 33.2% 33.2% 33.2% 33.2% 33.2%

Net Profit Margin 37.2% 28.4% 15.3% 29.6% 28.5% 31.9% 30.0% 30.0% 30.0% 30.0% 30.0%

Free Cash Flow Margin 33.7% 0.0% 50.5% 18.0% 21.5% 28.2% 8.4% 19.4% 21.0% 23.9% 25.5%

Liquidity and Debt 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Days Sales Outstanding 29.42 137.16 24.60 24.26 24.23 27.85 25.24 25.24 25.24 25.24 25.24

Inventory Turnover 18.91 21.39 22.93 20.80 19.55 18.56 20.54 20.54 20.54 20.54 20.54

Total Debt to Equity 0.0% 0.0% 0.0% 5.2% 3.7% 0.0% 0.6% 0.6% 0.6% 0.6% 0.6%

Total Debt to Assets N/A N/A N/A 3.6% 2.7% N/A 0.4% 0.4% 0.4% 0.4% 0.4%

Profitability 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Total Asset Turnover 0.48 0.45 0.38 0.36 0.41 0.44 0.41 0.41 0.41 0.41 0.41

Equity Multiplier 1.17 1.38 1.35 1.47 1.35 1.28 1.37 1.37 1.37 1.37 1.37

Return on Assets 17.9% 12.8% 5.8% 10.6% 11.7% 14.2% 12.2% 12.2% 12.2% 12.2% 12.2%

Return on Equity 20.9% 17.6% 7.8% 15.6% 15.8% 18.2% 16.6% 16.6% 16.6% 16.6% 16.6%

Return on Capital 59.4% 40.0% 51.6% 46.7% 60.2% 76.3% 60.9% 60.9% 60.9% 60.9% 60.9%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0.0

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0.2

0.3

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0.6

Total Asset Turnover Equity Multiplier

0

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160

Days Sales Outstanding Inventory Turnover

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80%

Gross Profit Margin Operating Profit Margin

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Net Profit Margin Free Cash Flow Margin

0%

1%

2%

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6%

Total Debt to Equity Total Debt to Assets

0%

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25%

Return on Equity Return on Assets

0%10%20%30%40%50%60%70%80%90%

Return on Equity Return on Capital


Capital, NOPAT & FCF 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

NOWC 2,649 5,572 2,754 3,574 4,427 3,227 5,922 7,106 8,172 8,744 9,006

Net Fixed Assets 1,788 2,162 2,387 2,373 2,414 2,851 4,507 5,408 6,220 6,655 6,855

Total Invested Capital 4,437 7,734 5,141 5,947 6,841 6,078 10,429 12,514 14,392 15,399 15,861

Effective Tax Rate 8.9% 17.4% 25.4% 25.4% 19.9% 19.5%

NOPAT 2,635 3,092 2,651 2,779 4,117 4,637 6,347 7,616 8,759 9,372 9,653

Free Cash Flow N/A -205 5,244 1,973 3,223 5,400 1,996 5,531 6,882 8,365 9,191

NOPAT Per Share 1.59 1.89 1.60 1.69 2.48 2.73 3.75 4.53 5.23 5.62 5.82

FCF/Share N/A -0.13 3.17 1.20 1.94 3.18 1.18 3.29 4.11 5.02 5.54

Return on Capital 59.4% 40.0% 51.6% 46.7% 60.2% 76.3% 60.9% 60.9% 60.9% 60.9% 60.9%

Intrinsic Value of FCFs Valuation Model

Value Creation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Economic Value-Added 2,236 2,396 2,188 2,244 3,501 4,089 5,408 6,490 7,464 7,986 8,226

Market Valued-Added 53,337 46,292 50,511 66,599 84,429 77,227 98,817 98,133 97,434 98,854 101,820

PV of Future FCFs 93,594 102,222 106,178 113,761 120,776 126,247 135,612 142,287 148,211 153,185 157,781

Value of Non-Oper. Assets 2,411 1,840 2,717 3,547 5,462 3,807 6,231 7,477 8,599 9,201 9,477

Total Intrinsic Firm Value 96,005 104,062 108,895 117,308 126,238 130,054 141,843 149,764 156,810 162,386 167,258

Intrinsic Value of Equity 96,005 104,062 108,895 116,222 125,244 130,054 141,606 149,479 156,482 162,036 166,897

Per Share Intrinsic Value $57.83 $63.76 $65.76 $70.74 $75.54 $76.50 $83.72 $88.82 $93.44 $97.25 $100.67

Year-End Stock Price $41.67 $39.36 $42.77 $53.23 $67.19 $65.16

Over (Under) Valuation/Sh ($16.16) ($24.40) ($22.99) ($17.51) ($8.35) ($11.34)

% Over (Under) Valued -38.8% -62.0% -53.7% -32.9% -12.4% -17.4%

Cost of Capital 2012 Weight % Cost Wgt Cost

Equity Capitalization 110,772 100.0% 9.0% 9.0%

Total Debt 0 0.0% 4.5% 0.0%

Preferred Stock 0 0.0% 0.0% 0.0%

Value of All Securities 110,772 100.0%

Effective Tax Rate 19.5% Long-Term Growth Rate:

Risk-Free Rate 2.00% 3.0%

5-Yr Beta 1.04 Alternative Beta:

Market Risk Premium 7.0% 1.00

CAPM Cost of Equity 9.0%

9.0%

(Tax rate from last historical year used in forecasts)

Weighted Average Cost of Capital:

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

Economic Value-Added Market Valued-Added

$0

$20

$40

$60

$80

$100

$120

Year-End Stock Price Per Share Intrinsic Value

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

($30)

($25)

($20)

($15)

($10)

($5)

$0

2007 2008 2009 2010 2011 2012

Over (Under) Valuation/Sh % Over (Under) Valued

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000

Total Invested Capital Net Fixed Assets

($2,000)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

NOPAT Free Cash Flow


Relative Valuation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Stock Price/Intr. Value $41.67 $39.36 $42.77 $53.23 $67.19 $65.16 $83.72 $88.82 $93.44 $97.25 $100.67

Price to Earnings 20.9 20.3 44.5 26.9 26.2 18.1 19.9 17.5 15.9 15.4 15.4

Price to Free Cash Flow N/A N/A 13.5 44.3 34.6 20.5 70.9 27.0 22.7 19.4 18.2

Price to Sales 7.8 5.8 6.8 8.0 7.4 5.8 6.0 5.3 4.8 4.6 4.6

Price to Book 3.7 2.6 2.6 2.9 3.1 2.6 2.4 2.1 1.9 1.9 1.9

Earnings Yield 4.8% 4.9% 2.2% 3.7% 3.8% 5.5% 5.0% 5.7% 6.3% 6.5% 6.5%

Dividend Yield 1.2% 1.5% 1.5% 1.4% 1.2% 1.4% 1.5% 1.7% 1.8% 1.8% 1.8%

Free Cash Flow Yield N/A -0.3% 7.4% 2.3% 2.9% 4.9% 1.4% 3.7% 4.4% 5.2% 5.5%

Relative Valuation Pricing Model Adjust 2013 Intrinsic Dividend Discount Valuation Model

2013E Ratio Ratio Ratio Metric Value QCOM QUALCOMM Incorporated

Price to Earnings 19.9 $4.21 $83.72 34.0% 20.0% 10.0% 5.0% 3.0%

Price to Free Cash Flow 70.9 $1.18 $83.72 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Price to Sales 6.0 $14.02 $83.72 $0.52 $0.60 $0.66 $0.72 $0.81 $0.93 $1.25 $1.50 $1.65 $1.73 $1.78

Price to Book 2.4 $34.56 $83.72

1-Yr Div Growth 14.8% PV Dividends 1-4 $4.90 Dividend Yeld 1.4%

2013E 3-Yr Div Growth 12.1% PV Perpetual Div. $21.01

Current Price $65.16 5-Yr Div Growth 12.3% Intrinsic Value $25.91 If Purchased For: $25.91

PV of Free Cash Flows $83.72 Risk-Free Rate 2.00% Current Price $65.16 Expected Return = 9.0%

Dividend Discount Model $25.91 5-Yr Beta 1.04 ($25.91) $1.25 $1.50 $1.65 $31.38 $29.66

Price to Earnings $83.72 Market Premium 7.0% Analyst Notes:

Price to Free Cash Flow $83.72 Required Return 9.0% Based on a current dividend of $0.93, expected growth as shown above and an equity required

Price to Sales $83.72 Alternative Beta 1.00 return of 9.0%, QCOM is worth $25.91 per share, vs. a current price of $65.16.

Price to Book $83.72

Compared With: Compared With:

Intel Corporation S&P 500 Index

Cisco Systems, Inc.

Expected Dividend Growth Rates

Intrinsic Value Estimates vs. Current Price

May 5, 2013

Annual Dividend

0

10

20

30

40

50

60

70

80

Price to Earnings Price to Free Cash Flow

0.01.02.03.04.05.06.07.08.09.0

Price to Sales Price to Book

0%

1%

2%

3%

4%

5%

6%

7%

Earnings Yield Dividend Yield

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Current Price PV of FreeCash Flows

DividendDiscount

Model

Price toEarnings

Price to FreeCash Flow

Price to SalesPrice to Book

Intrinsic Value Estimates vs. Current Price

-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%

QCOM INTC NASDAQGS:CSCO

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%QCOM ^SPX


Piotroski Financial Fitness Scorecard (10-point scale) 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Positive Net Income 1 1 1 1 1 1 1 1 1 1

Positive Free Cash Flow 0 1 1 1 1 1 1 1 1 1

Growing ROA (% change NI > % change TA) 0 0 1 1 1 0 0 0 0 0

Earnings Quality (Operating Income > Net Income) 1 1 1 1 0 1 1 1 1 1

Total Assets Growing Faster Than Total Liabilities 1 0 0 1 1 0 0 0 0 0

Increasing Liquidity (Current Ratio) 1 0 0 1 0 0 0 0 0 0

% Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1 0 0 0 0 0 0

Expanding Gross Margin 0 1 0 0 0 1 0 0 0 0

Asset Turnover (% change sales > % change assets) 0 0 0 1 1 0 0 0 1 0

Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1

Piotroski Score 6 6 6 9 6 5 4 4 5 4

Altman Probability of Bankruptcy Z-Score Weight 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

(Current Assets-Current Liabilities)/Total Assets 1.200 0.4580 0.4266 0.2616 0.2967 0.2886 0.3441 0.3441 0.3441 0.3441 0.3441

Retained Earnings/Total Assets 1.400 0.4839 0.5467 0.5145 0.5114 0.5274 0.4957 0.5130 0.5505 0.6290 0.7307

Earnings Before Interest & Tax/Total Assets 3.300 0.5000 0.4275 0.4023 0.4657 0.4418 0.4450 0.4450 0.4450 0.4450 0.4450

Market Value Equity/Total Liabilities 0.600 5.6946 5.9610 5.4019 7.0731 7.0205 5.4209 4.7686 4.3408 4.2008 4.2008

Sales/Total Assets 0.999 0.4504 0.3781 0.3589 0.4102 0.4441 0.4052 0.4052 0.4052 0.4052 0.4052

Altman Score 7.59 7.74 6.94 8.76 8.72 7.11 6.48 6.09 6.02 6.13

The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23

0

2

4

6

8

10

Piotroski Financial Fitness Scorecard (10-pt scale)

0

2

4

6

8

10

Altman Probability of Bankruptcy Z-Score


Documents

Applied Portfolio Management Analyst: Breanna Short QCOM ... · Applied Portfolio Management Analyst: Breanna Short Report Date: 5/5/2013 Market Cap (mm) $111,953 Annual Dividend