Post on 12-Apr-2018
Business Finance 4228/7225
Advanced Investment Analysis
The Stock Market
Summer 2013 Sector Team
Neil Patel
Jeffrey Mulac
Srinath Potlapalli
IT Sector Weight SIM vs S&P 500 As of 6/30/2013
14.43%
13.25%
13.86%
13.99%
12.14%
7.57%
16.85%
1.60% 2.10% 3.92% 0.22% 0.08% SIM Weight
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cash
Dividend Receivables
12.20%
10.50%
10.50%
16.70% 12.70%
10.20%
17.80%
3.30% 2.80%
3.30% 0.00%
0.00%
S&P 500 Weight Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cash
Dividend Receivables
Recap of the Recommendation
• Overweight IT Sector in SIM portfolio by 100-200 bps above the S&P 500 weightage.
• Increase IT Sector allocation by a total of 200-300 bps
• Why?
– IT Sector is underperforming the market by 9% YTD* (buying opportunities)
– Continued IT Sector growth in the future
– Improving economic conditions in the U.S.
*http://us.spindices.com/indices/equity/sp-500
• Overweight:
– Application and Systems Software (big data software growing in demand)
– Hardware (mobile sales continue to grow)
– Internet Software and Services (cloud computing)
• Underweight:
– PC semiconductors and equipment (decreasing demand)
– PC hardware (decreasing demand)
– IT consulting & services
Intel Inc
Company Overview:
Industry: Semiconductor
Ticker: INTC
Current Stock Price: $23.04
52-Week Range: $19.23-$26.90
Market Capitalization: $114.53B
Shares Outstanding: 4.97B
Beta: 0.99
Dividend Yield: 0.9(3.8%)
2012 Revenue: $53.34B
2012 Earnings: $11B
Data as of 7/19/13
Source: finance.yahoo.com
Business Analysis - Intel Inc
• Among stocks in the current SIM IT Portfolio Intel is the only company with major
revenue/earning stream from declining PC industry
Key Business Drivers:
• Corporate and Government IT Spending. Intel is a highly cyclical stock.
• Global demand for chips and competition from foreign suppliers such as ARM.
• PC/Notebook Demand both in domestic and international markets.
• R&D and Innovation.
• Falling PC and chip prices coupled with R&D spending impact margins.
• Data Center growth coupled with the proliferation of cloud computing.
• Growth in mobile device,smartphone and tablet sectors.
Business Analysis – Intel Inc
Stock Performance:
• Intel stock performed well during the past year due to growing business in Data Center Group
and expansion in software service arena
• Intel’s earnings might decline to rapid fall in demand for PC’s in the global market.
• Intel has been a late mover into mobile computing sector which is limiting its stock
performance.
• With high capex budgets and deteriorating PC demand Intel’s stock price may decline in the
near term.
For FY2013 Q2:
• Intel reported 39cents a
share vs Analyst
consensus of 40 cents.
• Intel to cut down its capex
and focus more on growing
mobile device sector under
the new management.
/.
Recent earnings report:
http://www.cbsnews.com/8301-505124_162-57594230/a-big-miss-for-intel-
earnings/
Financial Analysis
• .
Year Current
Year
Current+1
estimate
Current+2
estimate
Current
+3
estimate
Revenue 53,341 53,583 55,880 57,886
% growth from prior
year
-1% 0% 4% 4%
Earnings Per Share 2.24 1.87 2.03 2.05
% growth from prior
year
-12% -16% 8% 1%
• Revenue and earnings forecast for Intel
are sluggish in the near term
• Intel is expected to grow in mobile and
cloud computing with new technologies
Financial Ratio
(INTEL)
2012 2011 2010 2009 2008
Payout Ratio % 40.8 32.7 31.3 72.7 59.5
Free Cash Flow
Per Share
1.52 1.85 2.02 1.18 1
Capital
Spending($b)
(11.0
2)
(10.7
6)
(5.207
)
(4.51
5)
(5.19
7)
Net Margin (%) 20.63 23.97 26.28 12.44 14.08
ROE (%) 22.66 27.15 25.16 10.82 12.93
Financial Ratio
(ARM)
2012 2011 2010 2009 2008
Payout Ratio % 32.7 38.2 40.8 73.9 61.2
Free Cash Flow
Per Share(GBP)
0.09 0.13 0.13 0.07 0.07
Capital
Spending(gbp
mill)
(26) (13) (7) (10) (14)
Net Margin (%) 27.86 22.9 21.14 13.26 14.58
ROE (%) 14.18 11.52 10.53 5.47 7.06
Intel vs ARM – Financial Ratios (source: www.morningstar.com)
Source: Baseline
Valuation – Price Multiples Analysis
Relative to
Industry
High Low Median Current
P/Trailing E 1.1 .48 .84 .72
P/Forward E 1.1 .07 .84 .81
P/B 1.2 0.7 1.0 0.9
P/S 1.3 0.9 1.1 0.9
P/CF 1.4 0.6 0.9 0.7
Relative to
S&P 500
Hig
h
Low Media
n
Current
P/Trailing E 2.6 0.59 1.1 0.73
P/Forward E 2.9 0.69 1.1 0.83
P/B 1.9 0.9 1.2 0.9
P/S 5.3 1.4 2.6 1.5
P/CF 2.2 0.6 1.1 0.6
Absolute
Valuation
High Low Median Current Target
Multiple
Target E,
S, B,
etc/Share
Target
Price (F x
G)
A. B. C. D. E. F. G. H.
P/Forward E 35.7 8.4 17.1 12.5 17.1 1.87 31.97
P/S 8.3 1.8 3.2 2.2 3.2 10.78 34.49
P/B 6.2 1.8 3.0 2.3 3.0 10.3 30.9
P/EBITDA 23.1 4.31 9.15 5.62 9.15 4.25 38.93
P/CF 25.5 5.1 10.2 6.6 10.2 4.06 40.64
Valuation of price multiples indicate that Intel is valued below
S&P 500 and the Industry likely due to sluggish PC demand
forecast.
Target Price of Intel based on median historic P/E multiple is
$31.97.
Sensitivity Analysis - Intel Discount Rate = 11.5%
Reasons for the Assumption:
• Intel is a cyclical tech stock
• Uncertainty in growth
• Decline in core PC business
FCF Growth Rate = 5%
Reasons for the Assumption:
• Intel is leading in booming
Data Center business
• Intel has a good chance to
capture the mobile device
market
• Great corporate Governance
and brand Image
Discount
Rate
9.0% 9.5% 10% 10.5% 11% 11.5% 12.0%
2.5% $31.02 $28.65 $26.6 $24.82 $23.24 $21.85 $20.60
3.0% $32.63 $29.98 $27.71 $25.74 $24.03 $22.52 $21.18
Growth
Rate
3.5% $34.54 $31.53 $28.98 $26.81 $24.92 $23.27 $21.82
4.0% $36.83 $33.36 $30.47 $28.03 $25.94 $24.13 $22.25
4.5% $39.63 $35.56 $32.23 $29.46 $27.11 $25.11 $23.37
5.0% $43.13 $38.25 $34.34 $31.15 $28.49 $26.24 $24.31
5.5% $47.63 $41.61 $36.92 $33.17 $30.11 $27.55 $25.40
6.0% $53.64 $45.93 $40.14 $35.65 $32.05 $29.11 $26.66
Valuation – DCF Analysis INTEL(INTC)
Srinath Potlapalli
Terminal
Discount Rate = 11.5%
6/11/2013
Terminal FCF
Growth = 5.0%
Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Revenue 53,341 53,623 54,914 57,342 60,782 64,429 68,295 72,051 76,014 80,194 84,204
% Growth 0.5% 2.4% 4.4% 6.0% 6.0% 6.0% 5.5% 5.5% 5.5% 5.0%
Operating Margin 14,638 13,406 13,179 13,189 13,372 14,174 15,366 16,211 17,483 18,445 19,367
Operating Margin 27.4% 25.0% 24.0% 23.0% 22.0% 22.0% 22.5% 22.5% 23.0% 23.0% 23.0%
Gains(losses) on equity investments,net 141.00 150.0 150.0 150.0 182.3 193.3 204.9 216.2 228.0 240.6 252.6
% Growth 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Interest and Other 94 100 100 100 106 112 119 126 133 140 147
Interest % of Sales 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Taxes 3,868 3,551 3,492 3,494 3,552 3,765 4,079 4,304 4,639 4,895 5,139
Tax Rate 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0%
Net Income 11,005 10,105 9,938 9,945 10,109 10,715 11,611 12,249 13,204 13,931 14,627
% Growth -8.2% -1.7% 0.1% 1.7% 6.0% 8.4% 5.5% 7.8% 5.5% 5.0%
Add Depreciation/Amort 7,522 7,546 10,764 11,027 11,852 12,564 13,317 14,410 15,203 16,039 16,841
% of Sales 14.1% 14.1% 19.6% 19.2% 19.5% 19.5% 19.5% 20.0% 20.0% 20.0% 20.0%
Plus/(minus) Changes WC (754) 729 (116) (218) (365) (387) (410) (432) (456) (481) (505)
% of Sales -1.4% 1.4% -0.2% -0.4% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6%
Subtract Cap Ex 11,027 11,100 11,367 11,870 12,156 12,886 13,659 14,410 15,203 16,039 16,841
Capex % of sales 20.7% 20.7% 20.7% 20.7% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Free Cash Flow 6,746 7,280 9,219 8,884 9,440 10,006 10,860 11,817 12,748 13,449 14,122
% Growth 7.9% 26.6% -3.6% 6.3% 6.0% 8.5% 8.8% 7.9% 5.5% 5.0%
NPV of Cash Flows 58,575 43%
NPV of terminal value 76,811 57%
Terminal
Value 228,123
Projected Equity Value 135,386 100%
Free Cash Flow Yield 5.34%
Free Cash
Yield 6.19%
Current P/E 11.5 12.5 12.7 Terminal P/E 15.6
Projected P/E 12.3 13.4 13.6
Current EV/EBITDA 5.9 6.3 5.5
Terminal
EV/EBITDA 6.4
Projected EV/EBITDA 6.3 6.7 5.9
Shares Outstanding 5,160.0
Current Price $ 24.46
Implied equity value/share $ 26.24
Upside/(Downside) to DCF 7.3%
Debt 13,448
Cash 8,478
Cash/share 1.64
Current Price: $24.46
Target Price: $26.24
Upside to DCF: 7.3%
Based on an upside price of 7.3%,decline
in global PC demand and a slowdown in
emerging markets Intel is SELL
Additions to SIM IT Portfolio
Evaluated following 3 stocks for adding to the
SIM portfolio
• Yahoo(YHOO): Impressive growth in stock value over the past
year. Led by a new CEO.
• Oracle(ORCL): Stable large cap stock with little downside and
projected to have a good run with cloud computing business.
• Amazon(AMZN): Expected earnings growth due to global
expansion.
Additions to SIM IT Portfolio
We recommend
• Oracle’s core products are part of server infrastructure and its business growth is not impacted by decline in PC business.
• Growing revenue in cloud computing subscriptions.
• Oracle purchased Application software such as Peoplesoft, JD Edwards, Seibel, Hyperion, Java, Sun etc; to strengthen its database business.
• Oracle has made several acquisitions that should help it position well in he growing cloud computing business.
• Oracle’s core strategy is to integrate Database, Hardware and Server platforms into one single engineered platform and deploy them across the data centers.
DCF Valuation - Oracle
ORACLE(ORCL)
Srinath Potlapalli Terminal Discount
Rate = 11.0%
6/11/2013 Terminal FCF
Growth = 4.3%
Year 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
Revenue 37,121 37,180 38,072 39,595 41,377 43,446 45,835 48,356 50,774 53,313 55,978
% Growth 0.2% 2.4% 4.0% 4.5% 5.0% 5.5% 5.5% 5.0% 5.0% 5.0%
Operating Margin 13,705 14,682 15,035 15,636 16,340 17,157 18,100 19,096 20,056 21,059 22,111
Operating Margin 36.9% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5%
Gains(losses) on equity
investments,net 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00
% Growth 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Interest and Other (800) (800) (800) (800) (836) (878) (926) (977) (1,026) (1,077) (1,131)
Interest % of Sales -2.2% -2.2% -2.1% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0%
Taxes 2,981 2,973 3,279 3,417 3,570 3,749 3,955 4,172 4,381 4,600 4,830
Tax Rate 23.0% 21.4% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0%
Net Income 9,954 10,929 10,976 11,439 11,953 12,550 13,240 13,967 14,668 15,401 16,170
% Growth 9.8% 0.4% 4.2% 4.5% 5.0% 5.5% 5.5% 5.0% 5.0% 5.0%
Add Depreciation/Amort 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800 2,800
% of Sales 7.5% 7.5% 7.4% 7.1% 6.8% 6.4% 6.1% 5.8% 5.5% 5.3% 5.0%
Plus/(minus) Changes WC (380) (380) (380) (380) (380) (380) (380) (380) (380) (380) (380)
% of Sales -1.0% -1.0% -1.0% -1.0% -0.9% -0.9% -0.8% -0.8% -0.7% -0.7% -0.7%
Subtract Cap Ex 20 20 30 30 40 40 50 50 50 60 60
Capex % of sales 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Free Cash Flow 12,354 13,329 13,366 13,829 14,333 14,930 15,610 16,337 17,038 17,761 18,530
% Growth 7.9% 0.3% 3.5% 3.6% 4.2% 4.6% 4.7% 4.3% 4.2% 4.3%
NPV of Cash Flows 88,347 47%
NPV of terminal value 101,593 53% Terminal Value 288,465
Projected Equity Value 189,940 100%
Free Cash Flow Yield 8.37% Free Cash Yield 6.42%
Current P/E 14.8 13.5 13.4 Terminal P/E 17.8
Projected P/E 19.1 17.4 17.3
Current EV/EBITDA 9.2 8.7 8.5 Terminal EV/EBITDA 11.7
Projected EV/EBITDA 11.7 11.1 10.9
Shares Outstanding 4,630.0
Current Price $ 31.86
Implied equity value/share $ 41.02
Upside/(Downside) to DCF 28.8%
Debt 18,852
Cash 14,955
Cash/share 3.23
As of 7/21/13
Current Price: $31.86
Target Price: $41.02
Upside: 28.8%
Corning Inc.
Data as of July 19, 2013
NYSE: GLW
Industry: Electronic Components & Equipment
(specialty glass & ceramics)
Current Price: $15.03
52 wk range: $10.62 - $16.43
Market Cap: 22.3B
Shares outstanding: 1.48B
Beta: 1.76
Div (yield) 0.40 (2.7%)
Revenue: $8.012B
Earnings: $1.7B
SIM weight (June 2013): 3.93%
Revenue Breakdown
Display Technologies 36.3%
Telecommunications 26.6%
Environmental Technologies
12.0%
Specialty Materials 16.8%
Life Sciences 8.2%
Other 0.1%
2012 Revenue
Business Analysis
• Innovator of diverse products and uses – customers/partners include Apple,
Samsung, Sony, Dow Chemical, Verizon, AT&T
Business Drivers
• R&D and innovation
• Consumer spending: TVs, smartphones, tablets, cars
• Capital spending: auto & truck manufacturing, cable and internet lines
• Multi-use application of products – Gorilla Glass in windshields
– Willow Glass as roofing shingles, iWatch?
– View Inc. collaboration
Risks
• Loss of a top ten customer (50% of total revenue in 2012)
• Struggling international economies
• Declining LCD TV prices
• Supplier/materials loss
Stock Performance
• Stock is up 25% since July 21, 2012; outperforming S&P by 50 bps YTD
• Revenues are at all time highs and earnings are beginning to come around – acquisitions have
hindered income
• Declining LCD TV prices offset by improved fusion manufacturing process for glass (earnings up
4.2% in Q1 2013)
• Life Sciences division growing due to expansion into China and India
Valuation
Relative to
S&P 500 High Low Median Current
P/Trailing E 6.3 0.41 0.89 0.73
P/Forward E 6.5 0.57 0.99 0.75
P/B 2.6 0.4 0.9 0.4
P/S 5.9 1.7 3.7 1.9
P/CF 3.9 0.6 1.2 0.7
Relative to
Industry High Low Median Current
P/Trailing E 3.0 0.31 0.82 0.81
P/Forward E 1.2 0.64 0.89 0.82
P/B 0.9 0.4 0.7 0.7
P/S 2.2 0.7 1.3 1.0
P/CF 1.4 0.6 0.8 0.8
Sensitivity Analysis
• Discount Rate: 12%
– Corning, like industry very cyclical
– Decline in LCD prices
– Innovative products, but risk with new product R&D paying off
• Growth Rate: 4.5%
– Huge potential with many products: Gorilla Glass, Willow Glass, Advanced
Dynamic Glass
– Solid management with focus on R&D
– Acquisitions of Life Sciences labs has increased growth potential in segment
Discounted Cash Flow
• Current Price: $15.03
• Target Price: $19.22
• Potential Upside: 27.2%
BUY
75 bps
Apple (AAPL) Valuation
Relative to
Industry High Low Median Current
P/Trailing E 6.4 1.1 1.6 1.1
P/Forward E 3.5 0.92 1.6 1.0
P/B 2.2 0.4 1.2 1.1
P/S 4.4 0.8 2.6 1.7
P/CF 6.4 1.1 2.4 1.2
Relative to
S&P 500 High Low Median Current
P/Trailing E 8.1 0.62 1.8 0.63
P/Forward E 4.1 0.67 1.7 0.7
P/B 4.3 0.6 2.4 1.4
P/S 5.3 0.8 3.1 1.6
P/CF 7.6 0.8 3.0 0.9
Absolute
Basis High Low Median Current
P/Trailing E 161.5 9.5 29.8 10.2
P/Forward E 76.2 9.6 25.7 10.7
P/B 11.9 1.7 5.5 3.4
P/S 8.3 1.2 4.0 2.4
P/CF 82.6 8.4 29.8 9.0
AAPL considerations
Positives
• Top innovator for consumer electronics
• $60B share buyback plan to boost share price (by end of 2015)
• Products
– Per Tim Cook – new hardware, software and services to be unveiled in Fall 2013
and in 2014 (FY end 9/2013)
– Lower-end iPhone and iPad to steal market share from Samsung
– Larger screen iPhone and iPad to gain consumers
– iWatch
Negatives
• Can they produce profitable innovation in post-Jobs era – next big device?
• Down 19.6% YTD compared to S&P up 18.8%
• Google, Samsung consistently gaining ground
DCF - AAPL
Discount Rate = 12.5%
Growth Rate = 5%
Current Price: $424.19
Target Price: $592.13
Potential Upside: 39.6%
SIM Weight (June 2013): 4.6%
HOLD
Apple (AAPL)
Terminal Discount Rate = 12.5%
Terminal FCF Growth = 5.0%
Year 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
Revenue 170,803 186,229 197,662 212,487 226,298 241,008 253,058 265,711 278,997 292,946 307,594
% Grow th 9.0% 6.1% 7.5% 6.5% 6.5% 5.0% 5.0% 5.0% 5.0% 5.0%
Operating Income 56,400 57,100 62,000 65,871 70,152 74,712 75,917 79,713 83,699 87,884 92,278
Operating Margin 33.0% 30.7% 31.4% 31.0% 31.0% 31.0% 30.0% 30.0% 30.0% 30.0% 30.0%
Interest Income 11 17 18 425 453 482 506 531 558 586 615
Interest Inc as % of sales 0.0% 0.0% 0.0% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Other Income, net 550 562 575 6,800 7,242 7,712 8,098 8,503 9,486 9,960 10,458
Other Inc as % of sales 0.3% 0.3% 0.3% 3.2% 3.2% 3.2% 3.2% 3.2% 3.4% 3.4% 3.4%
Interest (161) (188) (198) (212) (226) (241) (253) (266) (279) (293) (308)
Interest % of Sales -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%
Taxes (158) (143) (148) (4,373) (4,657) (4,960) (5,056) (5,309) (5,608) (5,888) (6,183)
Tax Rate -6.9% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0%
Net Income 40,993 43,764 47,637 49,297 53,859 57,842 60,987 63,771 66,959 70,307 73,822
% Grow th 6.8% 8.8% 3.5% 9.3% 7.4% 5.4% 4.6% 5.0% 5.0% 5.0%
Add Depreciation/Amort 4,500 5,587 5,930 6,375 6,789 7,230 7,592 7,971 8,370 8,788 9,228
% of Sales 2.6% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Plus/(minus) Changes WC
% of Sales 0.0% 0.0% 0.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0%
Subtract Cap Ex 10,000 10,988 9,685 9,562 11,541 11,809 13,412 15,411 16,740 17,577 18,456
Capex % of sales 5.9% 5.9% 4.9% 4.5% 5.1% 4.9% 5.3% 5.8% 6.0% 6.0% 6.0%
Free Cash Flow 35,493 38,363 43,881 46,110 49,107 53,263 55,167 56,331 58,589 61,519 64,595
% Grow th 8.1% 14.4% 5.1% 6.5% 8.5% 3.6% 2.1% 4.0% 5.0% 5.0%
NPV of Cash Flows 277,320 50%
NPV of terminal value 278,483 50% Terminal Value 904,325
Projected Equity Value 555,804 100%
Free Cash Flow Yield 8.91% Free Cash Yield 7.14%
Current P/E 9.7 9.1 8.4 Terminal P/E 12.3
Projected P/E 13.6 12.7 11.7
Current EV/EBITDA 6.5 6.3 5.8 Terminal EV/EBITDA 8.9
Projected EV/EBITDA 9.1 8.8 8.2
Shares Outstanding 938.7
Current Price 424.19$
Implied equity value/share 592.13$
Upside/(Downside) to DCF 39.6%
Debt 3,382
Cash 4,988
Cash/share 5.31
12.0 12.25 12.5 12.75 13.0
4.5% 610.82 590.92 572.26 554.74 538.25
4.75% 622.23 601.38 581.88 563.58 546.42
5% 634.45 612.56 592.13 573.02 555.09
5.25% 647.58 624.54 603.09 583.07 564.33
5.5% 661.72 637.41 614.84 593.81 574.18
Qualcomm, Inc.
Company Overview (as of 7/23/2013):
Ticker:
Industry:
Current Price:
52-Week Price Range:
Market Cap:
Beta:
Dividend (Yield):
FY 2012 Revenue:
FY 2012 Earnings:
QCOM
Communication Equipment
$62.30
$56.30-$68.50
$107.6B
1.17
$1.40 (2.3%)
$19.121B
$6.109B
Investment Thesis
Catalysts:
• Qualcomm chips are used in a majority of smartphones, with enormous growth
potential in Asia.
• The number of 3G/4G connections is expected to reach 4B by 2016, up from 1.9B
currently.
• Qualcomm carries no long-term debt on its balance sheet.
• Qualcomm recently increased its cash dividend and share repurchase program.
• The stock has underperformed the S&P 500 by almost 20% YTD, signaling
undervaluation.
Risks:
• The smartphone market is becoming saturated in developed countries, particularly
the U.S.
• Qualcomm is solely dependent on global growth in mobile sales.
• Competition in the industry will continue to intensify, driving ASP’s lower over time.
• As the world transitions from 3G to 4G/LTE over the long-term, Qualcomm’s royalty
revenue per device will decrease.
Financial Analysis
Key Statistics Qualcomm
Texas
Instruments Broadcom NVIDIA
Market Capitalization: $106.9 bill ion $42.0 bill ion $19.9 bill ion $8.5 bill ion
Revenue (mrq): $6.1 bill ion $2.9 bill ion $2.0 bill ion $955.0 million
Revenue Growth (YoY): 24% -8% 10% -9%
Current Ratio: 3.4 2.6 2.3 5.0
Net Cash: $12.4 bill ion $(221) million $981 million $3.7 bill ion
% LT Debt/Total Capital: N/A 27.6% 14.8% 0.4%
Operting Margin: 30.4% 20.9% 10.9% 13.9%
ROE: 20.7% 16.8% 22.4% 15.1%
PEG Ratio (5 yr expected): 0.75 2.88 0.80 1.67
• Qualcomm has an advantage over its competitors in nearly every
category
• Current and PEG ratios
DCF Analysis
Recommendation: • Buy 75bps
• Increase current holding to
4.62%
Current P/E 15.67
Projected P/E 19.03
Current EV/EBITDA 8.22
Projected EV/EBITDA 10.57
Shares outstanding 1,763
Current price 62.30$
Implied equity value/share 75.65$
Upside/(downside) to DCF 21.4%
Sensitivity Analysis
10.00% 10.50% 11.00% 11.50% 12.00%
4.0% 80.87$ 74.48$ 69.01$ 64.27$ 60.13$
4.5% 85.46$ 78.21$ 72.08$ 66.82$ 62.28$
5.0% 90.96$ 82.61$ 75.65$ 69.77$ 64.73$
5.5% 97.69$ 87.90$ 79.88$ 73.21$ 67.56$
6.0% 106.10$ 94.36$ 84.96$ 77.27$ 70.86$
Discount Rate
Growth
Rate
Sensitivity Analysis
Discount Rate = 11% • Qualcomm is a cyclical company
• Dependence on global economy (China)
Terminal Growth Rate = 5% • Qualcomm is leader in cellular baseband processor market
• Mobile sales will continue to grow
Google, Inc.
Company Overview (as of 7/23/2013):
Ticker:
Industry:
Current Price:
52-Week Price Range:
Market Cap:
Beta:
Dividend (Yield):
FY 2012 Revenue:
FY 2012 Earnings:
GOOG
Internet Software & Services
$903.76
$604.34-$928.00
$301.1B
1.15
N/A (N/A)
$50.175B
$10.737B
DCF Analysis
Recommendation: • Hold
• Current holding is 4.45%
• As price appreciates, holding
will reach SIM max of 5%
Current P/E 20.77
Projected P/E 23.19
Current EV/EBITDA 14.35
Projected EV/EBITDA 16.02
Shares outstanding 333
Current price 904.13$
Implied equity value/share 1,009.39$
Upside/(downside) to DCF 11.6%
Sensitivity Analysis
Discount Rate = 11.5% • Majority of revenue is derived from online advertising
• Google receives lower advertising revenue on mobile devices
Terminal Growth Rate = 5.5% • Google is the leader in innovation (20% time)
• Google will continue to improve the ways in which people access
information
10.50% 11.00% 11.50% 12.00% 12.50%
4.5% 1,081.72$ 991.30$ 913.99$ 847.17$ 788.86$
5.0% 1,147.55$ 1,044.79$ 958.02$ 883.83$ 819.68$
5.5% 1,226.56$ 1,108.00$ 1,009.39$ 926.12$ 854.89$
6.0% 1,323.12$ 1,183.86$ 1,070.10$ 975.46$ 895.52$
6.5% 1,443.82$ 1,276.58$ 1,142.96$ 1,033.78$ 942.92$
Discount Rate
Growth
Rate
Sensitivity Analysis
SIM IT Portfolio Recommendations
Company Industry % of SIM Assets Decision to
Hold/Sell/Buy
Apple Inc Hardware/Electronic
Equipment
4.6% Hold
Google Inc Internet Software & Services 4.45% Hold
Intel Inc Semiconductor N/A Sell
QualComm Inc CommunicationEquipment 3.87% Buy 75 bps
Corning Inc Diversified Electronics 3.93% Buy 75 bps
Oracle Corp System Software/ Application
Software
N/A Buy 150 bps