Monday, February 6, 2012

Qualcomm Inc: $QCOM Cash Flow Valuation


Current Price: ~ $61/share
Projected Yield: ~ 1.41%




Qualcomm develops and licenses wireless technology and manufactures semiconductors for mobile phones. The company's key patents revolve around CDMA technology, which is a standard in wireless communications and is licensed by most major handset makers. The firm is also the world's largest wireless chipmaker, supplying many leading handset makers with cutting-edge processors. Qualcomm also has a variety of new ventures in development, such as Mirasol, a mobile display technology.         


Estimated WACC for the firm today is 11.49% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2002
826
2003
1543
2004
2136
2005
2110
2006
2568
2007
2993
2008
2161
2009
6411
2010
3650
2011
4307


Average Annual Growth FCF: ~ 34%
CAGR FCF: ~ 20%
Consensus Forecast Industry 5-Year Growth: ~ 15% per year
Consensus Forecast Company 5-Year Growth: ~ 16% per year
Internal Growth Rate: ~ 9%
Sustainable Growth Rate: ~ 14%

Scenario 1
Starting at $4307 million FCF, assume the company achieves a 5-year growth rate in FCF of 16% per year, then no growth or 0% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
4307
1
4996
2
5795
3
6723
4
7798
5
9046
Terminal Value
91310


The firm's future cash flows, discounted at a WACC of 11.49%, give a present value for the entire firm (Debt + Equity) of $77294 million. If the firm's fair value of debt is estimated at $928 million, then the fair value of the firm's equity could be $76366 million.  $76366 million / 1680 million outstanding shares is approximately $45 per share and a 20% margin of safety is $36/share.


Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 16% per year, then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
4307
1
4996
2
5795
3
6723
4
7798
5
9046
Terminal Value
140059


The firm's future cash flows, discounted at a WACC of 11.49%, give a present value for the entire firm (Debt + Equity) of $105591 million. If the firm's fair value of debt is estimated at $928 million, then the fair value of the firm's equity could be $104663 million.  $104663 million / 1680 million outstanding shares is approximately $62 per share and a 20% margin of safety is $50/share.


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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