Wednesday, August 16, 2006

Calls of Note Part 1

- The Merrill Lynch Focus 1 Committee has added Qualcomm (NASDAQ:QCOM) to its list. This is consistent with firm's Buy rating on Qualcomm, which is based on the following factors: 1) Attractive valuation, 2) A play on 3G wireless deployments, and 3) Strong earnings growth, and substantial cash flow generation. Earnings expected to grow significantly They expect EPS to grow 26% per annum between 2006 and 2008, driven mainly by deployment of 3G networks. Firm expects 3G handset pricing to drop significantly, to the $150 mark, over the next few quarters and the variety and availability of attractive phones to improve. In firm's view, this should drive 3G adoption, benefiting Qualcomm.

With the stock down ~18% YTD, they believe shares of Qualcomm present a good buying opportunity. Firm highlight an attractive valuation, with $2.33 (ex-options) in 2008 EPS (mid-cycle for 3G deployment) the basis of their $60 price objective.

Near-term risks exist:

Firm highlights some near term risks: 1) in October 2006, an administrative judge is expected to rule in Broadcom's patent infringement complaint against Qualcomm, with the worst case ruling (unlikely) preventing Qualcomm from selling its semiconductor products in the US, 2) In April 2007 Nokia's agreement with Qualcomm over 3G (WCDMA) royalty rates expires, and at this point of time it neither vendor is willing to compromise. Should Nokia stop paying Qualcomm royalties, Qualcomm's earnings could drop by 10-15% next year.

Notablecalls: This call will help QCOM today. However I suspect there will be a shorting oppy after the open.

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