Friday, December 22, 2006

Color on news: Qualcomm (NASDAQ:QCOM)

Several firms are commenting on QUALCOMM (NASDAQ:QCOM) after the co lowered their EPS guidance overnight:

- Morgan Stanley notes the EPS shortfall is being driven by higher legal expenses and bad debt reserves related to the Pantech Group in South Korea. Firm notes Pantech Group (Pantech, Curitel, and SK Teletech) shipped 4.1MM handsets in the 1H C2006, split between the CDMA and GSM/GPRS market.

With firm's revenue estimate already inline with the new guidance but with their chipset unit estimate slightly below, it suggests a mix shift to lower end phones (which will impact royalties in subsequent quarters) and/or lower sales of chipsets for basestations. CDMA+WCDMA handset shipments in the September quarter (royalties are recognized in arrears) are now expected to be 75-76MM units with a blended ASP of $210 versus firm's estimate of 75MM units and a blended ASP of $209 per unit.

Firm expects to update their estimates when they obtain further visibility into the March quarter. However they estimate there is $0.01 risk to adjusted EPS estimate of $0.43. Firm's F2007 EPS estimate of $1.77 also remains unchanged. They expect QCOM will face a modest amount of selling pressure on the news, as many investors remain hopeful for a favorable outcome of the ongoing licensing dispute with Nokia.

- Jeffco notes QCOM remains one of their best pure play picks into the 3G migration trend. As strong proxy for the broader wireless handset market, QCOM themetics for CY07 remains strong despite the on-going Nokia battle, and supports firm's positive stance on QCOM's position. There has been much pessimism about weaker handset demand, this is a positive datapoint for the sector. Firm believes that visibility should start improving in 2007 with potential resolution or settlement of many of the legal issues.

Maintains Buy and $54 PT.

- Goldman Sachs notes demand fundamentals appear positive which bodes well for the long term outlook for the shares. However, legal issues are likely to continue to dominate in the near-term, negatively impacting sentiment and limiting any near-term earnings upside. Nevertheless, the firm continues to believe that Investors with a long time horizon of 12 months or more will be paid to wait out the near-term impact of legal concerns. Fundamental demand remains healthy as demand for 3G continues to improve and 2G markets still have growth left in them, as QUALCOMM's chip segment continues to integrate in additional features and drive down prices with new chip designs. They see 2 potential upside catalysts: 1) the recent 3G chip win at Motorola could drive upside to 2008 estimates. 2) Qualcomm will be a key beneficiary of China's eventual move to 3G.

Firm is lowering their 12 month price target to $55 from $58.20. Maintains Buy.

Notablecalls: JPM is downgrading their rating to Underweight from Neutral saying that not only do these legal costs appear here to stay for some time, they suspect they could increase even further in the coming months. I expect QCOM to trade down following the downgrade as JPM may indeed be right. On the other hand, I see the stock as a bounce candidate, possibly below the $37 level.

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