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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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.
Student Investment Fund Stock Report
Qualcomm, Inc.
NASDAQ: QCOM
Analyst: Breanna Short
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
0.1
0.2
0.3
0.4
0.5
0.6
Total Asset Turnover Equity Multiplier
0
5
10
15
20
25
0
20
40
60
80
100
120
140
160
Days Sales Outstanding Inventory Turnover
0%
10%
20%
30%
40%
50%
60%
70%
80%
Gross Profit Margin Operating Profit Margin
0%
10%
20%
30%
40%
50%
60%
Net Profit Margin Free Cash Flow Margin
0%
1%
2%
3%
4%
5%
6%
Total Debt to Equity Total Debt to Assets
0%
5%
10%
15%
20%
25%
Return on Equity Return on Assets
0%10%20%30%40%50%60%70%80%90%
Return on Equity Return on Capital
QCOM-Report-05.05.13. Datasource: CapitalIQ Financial Analysis & Valuation, Page 2 of 5 Analyst: Breanna Short
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
QCOM-Report-05.05.13. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 5 Analyst: Breanna Short
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
QCOM-Report-05.05.13. Datasource: CapitalIQ Financial Analysis & Valuation, Page 4 of 5 Analyst: Breanna Short
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
QCOM-Report-05.05.13. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 5 Analyst: Breanna Short