Rule #1 Finance Blog

With Investor Phil Town


Jeff is deep into Qualcomm. Here's his analysis, then mine.

Hi Phil,


By partnering with and acting as an enabler to the business activities of these participants, QUALCOMM ultimately enables consumers, professionals and government entities — the end users who benefit from the success of the wireless industry today and into tomorrow.


Their Competitive Advantage (moat): Technology and patents. They are
leaders in the CDMA 3G protocol and have a number of technology
licencing agreements.  Worldwide, QUALCOMM's extensive patent portfolio
boasts more than 3,000 United States patents and patent applications
for CDMA and other technologies. Sales by QUALCOMM's licensees of
subscriber equipment generate approximately 85-90% of their royalty
revenues. With the rapid expansion of CDMA worldwide, license and
royalty revenues have consistently grown since the first commercial
deployment of CDMA technology in 1995.

Margin of Safety (including Excel formulas & Sticker Price)

Sticker Price: 419.30 (investools)

Current Price: 44.85


New CEO has worked his way up the corporate ladder.  He actually is the holder of many of their patents:

"I see increasing opportunities for QUALCOMM to deliver new products
and technologies that enhance the mobile phone's role as the most
personal electronic device in a world where wireless, computing,
entertainment and consumer electronics are converging," said Dr. Paul
Jacobs, CEO of QUALCOMM. "We will continue our focus on execution,
innovation and collaboration to rapidly bring new differentiated
services to the wireless market, creating even greater value for our
customers, partners, consumers and our shareholders."

QUALCOMM's selected awards and honors include:


* FORTUNE's "100 Best Companies to Work For"
*'s "Employers of Choice 500"
* Computerworld's "100 Best Places to Work in Information Technology"
* Work-Life Coalition's "Leaders in Corporate Work-life Initiatives for Wellness & Work-Time Options"
* San Diego Society of Human Resource Management's "Workplace Excellence Award"
* #2 on the U.S. Environmental Protection Agency's list of companies named "The Best Workplace For Commuters"
* "BEST" Training Organizations by the American Society of Training and Development


* Business Ethics Magazine's "100 Best Corporate Citizens"
* Association of Fundraising Professionals' "Outstanding Philanthropic Corporation in San Diego"
* San Diego Magazine's "Philanthropic Business of the Year Award"
* Corporate Citizen Group's "U.S. Corporate Citizen Award"

Big 5 Numbers

1. Return on Invested Capital (ROIC) see below

2. EQUITY   

5,516,328         4,812,415         5,391,956         7,598,572         9,664,000

3. EPS see below

4. SALES : see below
[The numbers below are 10 years' worth of numbers.]

1995     1996     1997     1998     1999     2000     2001     2002     2003     2004

EPS Growth 

0.00%     -45.50%     338.90%     15.20%     51.60%     202.90%     -190.20%     -158.60%     184.20%     64.00%

Sales Growth

0.00%     110.50%     157.60%     59.70%     17.60%     -18.80%     -16.20%     8.80%     32.00%     26.90%

Gross Profit Margin 

45.00%     34.00%     28.00%     30.00%   
37.00%     53.00%     61.00%     67.00%     67.00%     70.00%

Net Profit Margin

8.00%     3.00%     4.00%     3.00%     5.00%     19.00%     -22.00%     12.00%     21.00%     35.00%


4.00%     2.00%     9.00%     11.00%     7.00%     11.00%     -12.00%     7.00%     11.00%     18.00%

Current Ratio 

6.71     2.30     2.73     1.74     3.40     5.78     5.86     5.84     7.36     8.08

Quick Ratio   

6.29     1.78     2.33     1.31     3.10     5.60     5.68     5.71     7.22     7.91

Net Debt/Total Cap

3.00%     NS     NS     NS     —     —     0.00%     1.00%     0.00%     0.00%

10-yr D/E

4.19%     1.29%     0.75%     0.40%     —     —     0.00%     1.75%     1.62%     —


4.00%     -1.00%     5.00%     10.00%     8.00%     9.00%     9.00%     20.00%     17.00%     18.00%

Historical Ratio Summary

  • Description     Last 4 Qtrs     Rating     5-Year Avg     10-Year Avg
  • EPS Growth     64.00%         20.46%     46.25%
  • Sales Growth     26.90%         6.54%     37.81%
  • Gross Profit Margin     70.00%         63.60%     49.20%
  • Net Profit Margin     35.00%         13.00%     8.80%
  • ROE     18.00%         7.00%     6.80%
  • Current Ratio     8.08         6.58     4.98
  • Quick Ratio     7.91         6.42     4.69
  • Net Debt/Total Cap     NS         0.20%     NS
  • Debt/Equity     —         0.67%     1.00%
  • ROIC     18.00%         14.60%     9.90%


853,452     836,000         1,533,000         2,136,000

Commentary:  though EPS growth was Negative in 01-02, 5yr and 10yr are
good, they have strong recent growth especially the last 4 qts. ROIC is
good. Very Little Debt.   

Living the good life,



First M – Meaning
– is critical and Jeff seems to be well into this
business.  But here's the question, Jeff. Will Qualcomm be
around as a leader and still growing in 20 years?
  10 years,
even?  I dunno.  What if some other standard for cell phones
takes over the world like Windows did for PC's?  Big, big
question.  That said, assuming Jeff can make his case to himself
for longevity of this business, let's go on.


Second M: Moat.  Secrets moat.  No doubt about it and
the big five seem to agree.  Pretty consistent growth in all four
of the growth numbers and ROIC has climbed above the 10% minimum lately
but is just below over 5 years at 9%.  Maybe okay, though, since it's
improving quite a lot to 19%.


Third M: Management – as Jeff says, patent holder CEO and clearly someone with a BAG (Big Audacious Goal for the business).


Fourth M: MOS:  So what's the growth rate that we're going to
use?  The analysts are putting it at 18%.  Why would I trust
that number?  I'm going to look at the equity growth rate that I
calculated in Moat. 

I get about 24% using the rule of 72 – and I
get it both long and short term.  So yeah, I guess I'd go along
with the analysts and use 18%. 

Current trailing twelve months of
EPS is $1.18 so growing that forward with the rule of 72 I just ask
myself how many years does it take to double once at 18% a year? 
72 divided by 18 is 4.  4 years to double at our selected growth
rate.  So in 4 years the $1.18 should be up to about $2.36.
And four years after that it should be at $4.75.  And two more
years it should be at about $6.20. 

Now what's my multiplier?
Historically the business has been selling for a multiple of earnings
of about 35, and 2X the 18% growth rate I'm using is 36, so let's use
the historical of 35.  35 times $6.20 gives us $216 for
a future stock price ten years out.  That makes the sticker about
$54 a share right now, with an MOS of about $27.


Now that number is a whole bunch different than Jeff's answer,
and here's why:
  He's using Investools Valuation tool which
defaults to the historical PE. 

In Qualcomm's case the historical
PE is huge: over 400.  Which is nuts.  Remember that I never
use a mulitple of more than 50
.  So you have to check the numbers
and make sure they make sense just in case a really dumb number sneaks
in here on automated tools.  Yet another reason to know where all
the numbers come from.  So, Jeff, change the PE to 36 and you'll
get $53.94 – pretty close to my windage number of $54.


QCOM is selling for $45 today – which means we have about half the
margin of safety that we like.  On the other hand, we have some
margin of safety, which is good.  What to do? 

When I find a
new business (one that I've never owned) I find that it's kind of like
falling in love: At first it's so cool you just gotta get
involved.  And as you get involved, you want to know all about it, and that is when you might discover that it's not perfect.
But I'm such a lazy investor that I don't really do the homework to
find out about the imperfections until I'm already involved.  I
don't like to put a new business in my portfolio without the whole
enchilada MOS – the whole 50% below Sticker because I am prone to
screwing up, taking shortcuts, not doing my homework — and that makes me
want to be more cautious while I'm learning the business. 

on the other hand, may already know more about this business than I
ever could.  If he really gets it, then he can get in with as
little as 20% below the Sticker.
  In this case, that would let him
in at $45.  Exactly where we are.  That said, I'd still want
the technical tools to tell me the big boys are getting back into this
before I leap.


Now go play.


Phil Town