Qualcomm (NASDAQ:QCOM), a designer and builder of digital wireless telecommunications products and services, is one of the few public companies to enjoy a successful father-to-son transition. CEO Paul Jacobs, the son of founder Irwin Jacobs, envisions the company leading a future of sensor networks.
In 2005, I wrote about sensor networks as a possible technology in which companies might invest to boost their productivity. Two years earlier, Wal-Mart (NYSE:WMT) had been trying to create a kind of sensor network through an initiative to require its top 100 suppliers to install radio frequency identification, or RFID, by Jan. 1, 2005. RFID tags are small, 25-cent components including a chip, antenna and product information that Wal-Mart could track through in-store and in-warehouse RFID signal-reading machines.
While Wal-Mart didn’t meet its deadline, the benefits — reduced supply chain costs, shelves stocked with what consumers want and less of the rest, as well as diminished theft — made the Wal-Mart initiative a test case for sensor networks. And it was still working out the kinks by 2009.
Sensor networks also may help with building automation, industrial monitoring and perimeter security. Berkeley, Calif.-based Dust Networks’ SmartMesh technology deploys sensors that collect and transmit physical data for such industries.
But developers must address big challenges before sensor networks become the “next big thing” — these include being able to manage huge amounts of data, developing systems to hand off those data packets among different kinds of networks, and protecting privacy.
Qualcomm’s Jacobs envisions a world in which sensor networks proliferate, and part of the company’s $2.5 billion research budget is going to realize that vision.
He calls sensor networks “the Internet of things” — in which “TVs, dishwashers, running shoes, blood glucose monitors, picture frames, heart defibrillators and even Band-Aids have tiny chips or sensors that transmit information and communicate with mobile devices like smartphones and tablets,” according to a recent piece in the New York Times.
Regardless of when Qualcomm finds a way to profit from realizing that vision, the company’s operating performance has been solid. In its most recent quarter, its net income was $999 million and its adjusted earnings were 86 cents a share — six cents better than expected — on a revenue of $3.87 billion — $250 million ahead of expectations. And Jacobs noted, “We are raising our revenue and earnings guidance for the year as the demand for smartphones across an array of geographies and tiers continues to grow,” according to ZDNet.
In the last year, Qualcomm has been creating so-called Economic Value Added (EVA) Momentum, a sign that the company is generating cash flows that exceed the capital required to finance its operations. Bennett Stewart coined the term — it’s a number calculated by dividing the change in EVA [Net Operating Profit After Tax – (Total Assets – Current Liabilities) x the Weighted Average Cost of Capital)]/Beginning Period’s Revenue.
The best companies create value in excess of their cost of capital — generating a positive EVA momentum. The higher the EVA momentum, the faster management is creating value. And Qualcomm’s EVA Momentum is an impressive 9%. This figure comes from subtracting Qualcomm’s 2009 EVA of ($756 million) — it “destroyed value” that year — from its 2010 EVA of $132 million and dividing the difference by its 2009 revenues of $10.4 billion.
Does the market recognize Qualcomm’s ability to create value, making it worth adding to your portfolio? To think about that, we can look at their price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1.0 is a fair price, and anything below that is a bargain.
Qualcomm stock is cheap — trading at a PEG of 0.7. Its P/E is 23.7 and its earnings are forecast to grow to $2.77 a share in 2011.
If Paul Jacobs can realize his vision of an Internet of things, Qualcomm’s stock could be a valuable addition to your portfolio.
Peter Cohan has no financial interest in the securities mentioned.
