InvestorPlace’s Vince Martin sees the QCOM stock price as fairly overpriced at almost 18 times adjusted earnings. Furthermore, with the competitive landscape that lies ahead for Qualcomm, shareholders should take the money and run.
I would tend to agree.
QCOM Stock’s Fiscal 2017
A quick look at Qualcomm’s fiscal 2017 ended Sep. 24, 2017, on a non-GAAP adjusted basis, shows us that revenues declined by 1.2% to $23.2 billion, while operating income was off 9.5% to $7.1 billion from $7.8 billion a year earlier. Also, its operating cash flow declined by 37% in 2017 to $4.7 billion.
In other words, its performance in 2017 was nothing to write home about, yet QCOM stock continued to move higher.
Qualcomm’s currently in the process of trying to close its $38-billion acquisition of NXP Semiconductors NV (NASDAQ:NXPI) that it announced in October 2016. This October, 3.6% of NXPI’s shares were tendered, the first monthly increase since February. Qualcomm now says the acquisition might not close until early 2018.
With or without NXP, Broadcom is pushing ahead in its attempt to acquire Qualcomm.
As Martin suggests, why pay almost 18 times adjusted earnings when you can buy Intel Corporation (NASDAQ:INTC) for 14 times earnings and Micron Technology, Inc. (NASDAQ:MU) for approximately seven times earnings?
Qualcomm’s already rejected Broadcom’s $70 offer. There is no guarantee that it will bring a sweetened $80 offer, although the stars point to Tan increasing the stock portion of it to get it done without affecting its credit rating.
So, let’s assume you’re going to get $80 a share sometime in 2018. Approximately $60 will be in cash and Broadcom stock for the remaining $20.
Three Options for Deploying Proceeds From QCOM Stock
I’m going to suggest buying the following three stocks should the deal close between Broadcom and Qualcomm at $80 a share.
All three are currently trading around $20 and make sound investments. You may want to hang onto the remaining $20 in Broadcom stock.
KKR & Co. (KKR)
KKR & Co. L.P. Unit (NYSE:KKR) is the investment firm that became famous in the late 1980s when it acquired RJR Nabisco in a leveraged buyout that became the subject of a best-selling book. It has moved on to become a lot more than a private equity shop.
Trading at just 1.4 times its book value per share of $14.37, it generates investment management fees which get paid regardless of how it performs, performance fees for delivering outstanding results, and returns from the money it invests alongside the investors in its funds.
When it’s doing well, all three revenue streams are moving higher in tandem. Through the first two quarters of 2017, that’s what’s happened with total revenues up 155% over last year to $3.1 billion.
Interpublic Group of Companies (IPG)
As the advertising industry continues to transition to a digital business model, Interpublic Group of Companies Inc (NYSE:IPG) has also had to adapt to the new realities of advertising.
In its Q3 2017 report, IPG experienced a slight decline in year-over-year revenue to $1.90 billion from $1.92 billion a year earlier. Thanks to good cost containment, it managed to deliver a 5.3% increase in operating income.
IPG’s stock is down 15% year-to-date through Nov. 28 in a year in which the S&P 500 is up almost 20%. The company’s P/E of 13.5 hasn’t been this cheap since 2012. Analysts expect the company’s earnings to improve over the next two years which should deliver an expansion of its multiple.
Hanesbrands Inc. (NYSE:HBI) announced good Q3 2017 earnings Nov. 2, including a return to organic revenue growth. Unfortunately, investors were spooked by its conservative guidance for the fourth quarter due in part to the bankruptcy of Sears Canada.
As a result, HBI stock has dropped about 10% over this month and now has an earnings yield of 8.2%, more than three times Qualcomm’s.
The only downside to the T-shirt and underwear manufacturer at these prices is the $3.6 billion in long-term debt, a reasonably high 47% of its $7.4 billion market cap.
International sales are growing at a double-digit pace and now represent 30% of its overall revenue. Also, its e-commerce business is expected to deliver $600 million in sales in 2017.
HBI is adapting to the new retail environment which should be reflected in a higher stock price in 2018.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.