William L. Moore
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Despite Terrible Second Quarter, There Are Still Good Reasons to Buy Qualcomm

QUALCOMM, Inc.  is set to report its second quarter results on Wednesday. Michael McConnell of Pacific Crest listed five reasons to buy the stock.

McConnell remains a buyer of Qualcomm, saying stabilizing QTL (Qualcomm Technology Licensing), catch-up payments, and S820 share gains are likely to drive higher estimates post earnings. The analyst's comments come as QUALCOMM's second quarter results face tough year-over comparisons.

  • (1) "Valuation appears to discount the midpoint of QTL guidance for F2016 with no value ascribed for QCT (Qualcomm CDMA Technologies)."
  • (2) "Catch-up QTL sales could add $0.37 in EPS."
  • (3) "QCT sales and margins are likely to trough in F2Q16."
  • (4) "Dividend yield is 4.2 percent."
  • (5) "M&A and/or higher capital returns."

The analyst expects QUALCOMM's second quarter results to be in line to slightly above the midpoint of guidance of $4.9 billion to $5.7 billion in revenue and $0.90 to $1.00 in EPS.

Street expects earnings of $0.96 a share on revenue of $5.34 billion. The Street estimate implies a drop of 31 percent in earnings and 22.60 percent in revenues.

However, McConnell noted a 50 to 60 percent Snapdragon 820 unit share at Samsung Galaxy S7/S7 Edge Smartphones and potential catch-up payments from Chinese licensees should help Qualcomm's results.

According to the note, QUALCOMM has signed four of the top five China smartphone OEMs, including Lenovo (13 percent unit share), to new license agreements since the issuance of 2016 outlook.

"We expect these new license agreements to reverse underreported 3G/4G device sales to China ($28 billion) in F2015, and possibly result in potential catch-up revenue of $786 million and EPS of $0.37 to our model this fiscal year," the analyst added.

Meanwhile, a dispute with LG has adversely affected the company sales by at least $100 million in the first quarter and remains an overhang on the stock.

"Although QUALCOMM is confident that arbitration with LG will end favorably, the timing of a resolution could be beyond F2016, which would adversely affect QTL guidance by several hundred million dollars. We estimate potential risk of a $375 million+ hit to QTL guidance for F2016, or an estimated EPS impact of $0.21," McConnell highlighted.

However, the analyst, citing company comments, expects the dispute to be resolved by fiscal 2017 at the latest.

McConnell has a price target of $63 on the stock.