Here is a look at how Qualcomm Inc. (QCOM) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $114.88 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $43.27 |
| Value Based on 0% Growth | $25.36 |
| Market Implied Growth Rate | 8.12% |
| Net Current Asset Value (NCAV) | $6.01 |
| PEmg | 24.73 |
| Current Ratio | 3.75 |
| PB Ratio | 3.45 |
Balance Sheet - 9/30/2013
| Current Assets | $19,555,000,000 |
| Current Liabilities | $5,213,000,000 |
| Total Debt | $0 |
| Total Assets | $45,516,000,000 |
| Intangible Assets | $6,529,000,000 |
| Total Liabilities | $9,428,000,000 |
| Outstanding Shares | 1,685,000,000 |
Earnings Per Share
| 2013 | $3.91 |
| 2012 | $3.06 |
| 2011 | $2.70 |
| 2010 | $1.96 |
| 2009 | $0.95 |
| 2008 | $1.90 |
| 2007 | $1.95 |
| 2006 | $1.44 |
| 2005 | $1.26 |
| 2004 | $1.03 |
| 2003 | $0.63 |
| 2002 | $0.32 |
Earnings Per Share - Modern Graham
| 2013 | $2.98 |
| 2012 | $2.39 |
| 2011 | $2.00 |
| 2010 | $1.64 |
| 2009 | $1.49 |
| 2008 | $1.68 |
Conclusion:
Qualcomm Inc. is a very attractive company at a great price. The company nearly qualifies for the Defensive Investor, but fails due to a high PEmg ratio and a high PB ratio. However, the company passes all of the five requirements of the Enterprising Investor due in large part to its excellent financial position and its strong earnings history. Enterprising Investors should feel comfortable proceeding with further research, beginning with a review of the ModernGraham Valuation of Intel Corporation (INTC). From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.68 in 2008 to $2.98 in 2013. This proven level of growth easily supports the market's implied growth rate of 8.12% and the company would therefore appear to be undervalued at the current time.
What do you think? Do you agree that Qualcomm Inc. is undervalued? What would be your assessment? Is the company suitable only for and Enterprising Investors?
Disclosure: The author did not hold a position in Qualcomm Inc. (QCOM) at the time of publication and had no intention of entering into a position within the next 72 hours.
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