The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

24 July 2008

Up, up, and away...

Remember my post, Is It Safe?

In it, I recommended the shares of Qualcomm/QCOM. In doing so, I said,
"... investors find a company whose growth rate matches or exceeds its PE, a PEG of 1 or less. (This calculation ignores the intellectual property lawsuit with Nokia/NOK, and which Qualcomm appears to have the upper hand.)"

In news that catches Wall Street by surprise, "Qualcomm and Nokia put an end to their patent battles - a move that could benefit both companies. Financial terms weren't disclosed, but the companies described it as a 15-year agreement that includes Nokia making an up-front payment, and paying ongoing royalties - which implies Nokia may now become a Qualcomm customer. 'This is a landmark deal,' Lehman's Timothy Luke said. 'This removes a ton of uncertainty from the industry.' He estimates Nokia should owe Qualcomm about $600M for 2008 alone." More info here.

This is the type of news event that causes a sudden, and vicious, fundamental revaluation of the affected company's shares; in this instance Qualcomm/QCOM.

Oppenheimer notes that, in a surprise move, QCOM and NOK have settled all legal disputes and have entered into a new long-term (15 years) licensing agreement. Not only does the new license include all technologies (4G) but it also sets a bar for the whole industry establishing QCOM as a co all must deal with to be a player in current 3G and future 4G technologies. The firm thinks QCOM's business model has been validated and investors' concerns are now put to bed. They note the financial terms are unknown, but as a reference point, the firm calculate's EPS upside to FY09 of mid-20 cents (at a 2% rate) to mid-50 cents(at a 4% rate). They note June-quarter results were in-line with previous mid-quarter update. While the shares would likely see a jump, they would still buy on the strength as they expect QCOM's multiples to expand over the next year with its long term growth now re-established.
Citigroup adds QCOM to their 'Top Picks Live' list following the NOK settlement. The firm estimates that the potential 2009 EPS impact of the Nokia settlement is $0.26, comprised of $0.21 in royalties (assuming 2%-3% royalties, $212 handset ASP and 122M Nokia 3G and CDMA handsets), $0.04 in reduced legal fees (assuming $100 mln less legal fees out of $300 mln total), and $0.01 in increased interest income. They note that applying a 20x-23x multiple to this incremental EPS adds $5.60 to the shares.
(Thank you to for these two research notes.)

In early pre-market trading, QCOM shares are bid higher ~20% to $53.75. Recall also from that earlier post, I stated "upside breakouts lie at ~$43 and, crucially, at ~$54." So here lies Qualcomm/QCOM shares, immediately beneath crucial resistance, a close above which would change the pattern materially, measurably, and obviously. Obvious, that is, to most investors who fought the bullish change for Qualcomm/QCOM shares, which is the grand design of area (congestion) patterns; the lengthier, the more confounding.

You, on the other hand, had advance knowledge, so come prepared for today's gap higher. Congratulations.

Full Disclosure: Long Qualcomm/QCOM.
-- David M Gordon / The Deipnosophist

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