Qualcomm Inc. (QCOM) is slated to release its third quarter 2011 results on Wednesday, July 20, after the closing bell. The current Zacks Consensus Estimate for the third quarter is pegged at 62 cents per share, representing an annualized growth of 24.36%.
With respect to earnings surprises over the trailing four quarters, Qualcomm has outperformed the Zacks Consensus Estimate in all the four quarters. The average earnings surprise was a positive 6.69%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Second Quarter Highlights
On April 20, 2011, Qualcomm reported its second quarter 2011 financial results. On a GAAP basis, quarterly net income was $999 million or 59 cents per share compared with a net income of $774 million or 46 cents per share in the year-ago quarter. Adjusted (excluding special items) EPS came in at 77 cents, well above the Zacks Consensus Estimate of 72 cents.
Total revenue of $3,875 million was up 46% year over year and surpassed the Zacks Consensus Estimate of $3,639 million. The growth in revenue was primarily driven by increased demand for smartphones and data-centric devices. Gross margin was 64.8% compared with 69.6% in the year-ago quarter. Quarterly operating margin was 27.7% versus 29.1% in the prior-year quarter.
Agreement of Estimate Revisions
In the last 30 days, out of the 11 analysts covering the stock, none increased or decreased their EPS estimates for the third quarter of 2011. Similarly, for the fourth quarter of fiscal 2011, none of the 10 analysts covering the stock revised their EPS estimates.
For fiscal 2011 and 2012, over the last 30 days, out of the 13 analysts covering the stock, 1 analyst raised the EPS estimate while none lowered the same.
Most of the analysts prefer to remain on the sidelines as we believe that most of the positives on Qualcomm’s stock are already factored in the current valuation, thus leaving little scope for any upside. Furthermore, the company is currently trading higher at the 52-week price trend.
Magnitude of Estimate Revisions
During the last 30 days, the Zacks Consensus Estimate was in line with the current estimate of 62 cents for the third quarter of 2011 and 67 cents for the fourth quarter of 2011. Similarly, for fiscal 2011, during the last 30 days, the Zacks Consensus Estimate was at par with the current estimate of $2.77. However, for fiscal 2012, the Zacks Consensus Estimate was just a penny short of the current estimate of $3.13.
Earning Surprises
In the previous quarter, Qualcomm reported an EPS of 77 cents, which beat the Zacks Consensus Estimate by 5 cents. The current Zacks Consensus Estimates for the ongoing and the fourth quarter contain a 0.00% upside potential (essentially a proxy for future earning surprises). Similarly, the fiscal 2011 Zacks Consensus Estimate reflects a 3.61% growth potential while fiscal 2012 contains an upside of 5.43%.
Our Recommendation
We believe the company’s record-high earnings, strong balance sheet and solid management outlook for the current fiscal year will act as positive catalysts in the long run. Moreover, the growing popularity of smartphones and tablets coupled with increased deployment of 3G/4G networks will further drive the stock upward.
However, stiff competition from formidable rivals like Broadcom Corporation (BRCM) and Texas Instruments Inc. (TXN) as well as lower ASP of smartphones will negatively impact Qualcomm’s royalty business going forward.
We maintain our long-term Neutral recommendation on Qualcomm. Currently, Qualcomm has a Zacks #3 Rank, implying a short-term Hold rating on the stock.
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