By Chris Bulkey, principal analyst at Technology Research Group
shares are set to move lower as investors digest results for the second quarter of fiscal 2010.
Earnings quality irregularities don't appear to be a catalyst for thislatest round of volatility. Recall that declining operating leverage, liberal use ofasset impairments to stabilize expense levels, backlog reduction, and aggressivemanagement of valuation allowances were a few of the items criticized in previousreports (with commoditization of CDMA technology the underlying cause).
A disappointing outlook for the third quarter isn't sitting well with investors.Guidance suggests earnings will be flat to down slightly on a year-to-year basis in both GAAP and pro forma terms. A sustainable growth rate -- return on equity multipled by retention rate -- in the 6% range aggravates an already unfavorable risk/reward tradeoff.
An unhealthy variance between pro forma and fully expensed earnings expectations adds fuel to the fire. Consensus GAAP EPS forecasts are roughly 19% and 14% below pro forma for fiscal 2010 and 2011, respectively. Estimates that aren't fully expensed overstate growth potential and understate corresponding valuation multiples.
Shares are down 9% year to date and valued at 32 times trailing GAAP earnings. Loose comparable
trades at 280 times due to depressed profitability. A multiple on trailing earnings more than five times above sustainable growth leaves Qualcomm's valuation vulnerable to a potentially sizeable correction.
We reiterate a sell rating and $36 price objective; target multiple goes to 16 times fiscal 2010 EPS estimate from 20 times.