Following the fiscal third-quarter (ending June 30, 2012) earnings announcement on July 19, 2012, most of the analysts covering Qualcomm Inc. (QCOM) have remained neutral on the stock. This is primarily on the back of a weaker chipset sales outlook for fiscal 2012 due to a manufacturing shortage of a key 28 nanometer chipset.
Third Quarter Highlights
On a GAAP basis, quarterly net income from continuing operation was $1,207 million or 69 cents per share, compared with $1,035 million or 61 cents in the year-ago quarter. Adjusted EPS came in at 73 cents, falling short of the Zacks Consensus Estimate of 77 cents.
Quarterly total revenue of $4,626 million was up 28.0% year over year, but was below the Zacks Consensus Estimate of $4,690 million. During the third quarter, Qualcomm shipped approximately 141 million CDMA-based MSM chipsets, up 18% year over year. Gross margin was 64.4%, compared with 64.7% in the year-ago quarter. Quarterly operating margin was 30.0%, compared with 31.0% in the prior-year quarter.
Agreements of Analysts
Of the nine analysts covering the stock in the last 7 days, none revised the estimate for the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013. Over the past 30 days, seven out of nine analysts covering the stock have downgraded the estimates while none have revised the estimates upwards for the fourth quarter of fiscal 2012. Similarly, for the first quarter of fiscal 2013 six out of the nine analysts have reduced the estimates while one has revised the estimate upward.
For fiscal 2012, none of the nine analysts covering the stock have revised their estimates over the last 7 days. Likewise for fiscal 2013, out of the nine analysts covering the stock, none has changed the estimate for the given period.
For fiscal 2012, seven out of the nine analysts covering the stock in the last 30 days have reduced their estimates while none have raised their estimates. Similarly, for fiscal 2013, out of the nine analysts covering the stock, five have reduced the estimates while two have moved in the opposite directions.
Despite teaming up with Taiwan Semiconductor Manufacturing Company Ltd. (TSM) and United Microelectronics Corporation (UMC), Qualcomm declared that the supply chain problem will not be solved before the first half of 2013. We believe this is the primary reason for the analysts to remain on the sidelines.
Currently, the Zacks Consensus Estimate for the fourth quarter of fiscal 2012 is pegged at 70 cents. The projected annual growth is 2.94%. For the first quarter of fiscal 2013, the Zacks Consensus Estimate of 89 cents indicates an annualized growth of 5.10%.
Magnitude of Estimate Revisions
During the last 7 days, the current Zacks Consensus Estimates for the fourth quarter of 2012 and the first quarter of 2013 remained in line with the previous estimates of 70 cents and 89 cents, respectively.
During the last 30 days, the current Zacks Consensus Estimate for the fourth quarter of 2012 is 10 cents below the earlier estimate of 80 cents. Similarly for the first quarter of fiscal 2013, the current Zacks Consensus Estimate is 7 cents below the earlier estimate of 96 cents.
For fiscal 2012 and 2013, the current Zacks Consensus Estimates are at par with the prior estimates of $3.18 and $3.71 in the last 7 days. However, the Zacks Consensus Estimate for fiscal 2012 is 13 cents below the earlier estimate of $3.31 in the last 30 days. Similarly, for fiscal 2013, the current Zacks Consensus Estimates is 10 cents below the earlier estimate of $3.81.
The company fell short of the Zacks Consensus Estimates in two out of the four previous quarters. In the last quarter, Qualcomm’s reported earnings lagged by 4 cents or 5.19%.
No surprises are expected for the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013. Moreover, EPS growth potential for fiscal 2012 and 2013 are also at breakeven.
We believe that the gradual adaptation of 4G LTE handsets in the developed markets of the U.S., Japan, and South Korea coupled with the massive demand of smartphones and tablets in the emerging economies will drive the stock upward. Moreover, 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.
However, weaker outlook, stiff competition from its rivals like Broadcom Corporation (BRCM) and Texas Instruments Inc. (TXN), coupled with cheaper smartphone sales, will exert further pressure on smartphone ASPs, thereby affecting the royalty business of Qualcomm 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.
About Earnings Estimate Scorecard
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