<DAILY DOUBLE>
Thursday, August 12, 1999

Qualcomm, Inc.
(Nasdaq: QCOM)
Phone: 619-587-1121
Website: www.qualcomm.com
Price (8/11/99): $149 3/4

HOW DID IT DOUBLE?

Love them or hate them, cell phones and other mobile communication devices are here to stay. One company that is successfully making the wired world a bit more wireless is Qualcomm. And those who have answered the call to buy stock in the company have seen a variety of positive news items push the stock to new highs.

The first major puff of wind behind Qualcomm's sails (and sales) came earlier this spring when it was announced that the company and Ericsson (Nasdaq: ERICY) were ending on amicable terms a long-standing argument about patents. In the agreement, Ericsson was set to purchase Qualcomm's wireless infrastructure business while Qualcomm kept the majority of the patent rights related to its Code Division Multiple Access (CDMA) technology. More importantly, Qualcomm gained an important ally in the ongoing and highly competitive wireless standards war.

Then on July 8 it was announced that Qualcomm would be added to the S&P 500 index. Not only did this have the short-term effect of pushing the stock up thanks to folks trying to "front-run" the scads of index funds that would be forced to buy the stock, but making it into the prestigious index also marked an important milestone in the company's evolution. The company then proceeded to blow away its profit estimates (before one-time charges) on July 19 with word of extremely strong demand for its wireless phones and the chips that run them. With the good news running deep, it's little wonder Qualcomm's stock has rung up some impressive gains.

While Qualcomm's stock did essentially nothing for years, the last few months have been a drastically different story. Starting the year trading at $25.91, Qualcomm has managed to increase over six times in value thus far in 1999. That makes Qualcomm one the best performing large-cap stocks of the year, giving those who dialed into the company something to smile about.

BUSINESS DESCRIPTION

Based in San Diego, Qualcomm is one of the leading wireless communications companies. The majority of the firm's products are based on its proprietary Code Division Multiple Access (CDMA) technology, one of the emerging standards for next-generation digital wireless systems. The company sells CDMA-based phones, chips, and software. Additionally, Qualcomm licenses its CDMA technology to other wireless equipment makers.

Qualcomm was one of the founding companies of Globalstar (Nasdaq: GSTRF), a firm building a satellite-based communications system similar to what Iridium (Nasdaq: IRID) currently operates. Qualcomm also publishes the popular e-mail program Eudora.

On July 21 Qualcomm became one of the 500 large, domestic companies that make up the S&P 500. The company sold 6.9 million shares in a secondary offering at $156 1/2 per share primarily to index funds that are trying to mimic the S&P 500.

FINANCIAL FACTS*

Income Statement
12-month sales: $3,804 million
12-month income: $104.8 million
12-month EPS: $0.69
Profit Margin: 2.8%
Market Cap: $28,128 million

Balance Sheet
Cash: $436.1 million
Current Assets: $1,693.2 million
Current Liabilities: $750.9 million
Long-term Debt: $2.3 million
Shareholders' Equity: $1,409.2 million

Ratios
Price-to-earnings: 217
Price-to-sales: 7.4

(*Note -- Figures do not take into consideration the company's recent secondary offering and include one-time charges.)

HOW COULD YOU HAVE FOUND THIS DOUBLE?

One way to have heard Qualcomm calling was to screen for companies that have beaten their earnings estimates. The company has smoked its profit estimates for several quarters in a row and has reported absolutely scorching results in the two most recent periods.

In the first calendar quarter, Qualcomm reported earnings of $0.41 per share, far above the $0.29 Wall Street was expecting. In the most recent quarter, Qualcomm reported $0.75 a share in profits (before charges), yet again easily outpacing the $0.63 that was expected. Sometimes the market is a little slow to realize that a company is as healthy as it really is, and watching for those that beat their estimates is a good way to perhaps get a jump on Wall Street before the news really sinks in.

Another way to have dialed into Qualcomm was to look at the Ericsson agreement. For those who have been watching the wireless market and pondering which next-generation technology would become the standard, having Ericsson yield on the CDMA patents and actually get behind Qualcomm's CDMA licensing efforts was obviously a major victory for the company, even though the war is far from over between Qualcomm's CDMA and the competing GSM standard.

WHERE TO FROM HERE?


The continuing fate of Qualcomm largely rests on the future of CDMA. If CDMA can indeed become the next digital standard for wireless communications, Qualcomm will be in the envious position of being able to sit back and collect the easy money of massive royalties on its patents. Plus, demand for the company's phones and chips would continue to swell.

However, it's still not certain which technology will ultimately be embraced by the wireless market. CDMA has the advantage of offering better sound quality and higher capacity than GSM, but the competing GSM standard is generally cheaper to build and has better roaming capabilities. Furthermore, GSM has a huge installed base overseas in Europe and Asia. Estimates of worldwide usage show that GSM phones outnumber CDMA phones by a 6-to-1 margin. Again, the war is anything but over.

Qualcomm may have kissed and made up with Ericsson, but the company remains in some fairly nasty legal battles with wireless titan Motorola (NYSE: MOT). Nevertheless, Motorola still sells phones based on Qualcomm's CDMA technology as do Nokia (NYSE: NOK.A) and Ericsson. Another major force behind CDMA is Sprint (NYSE: FON), since Sprint's popular PCS service is based on Qualcomm's technology. For those watching the war, it will be important to spy where the other wireless providers congregate.

On the valuation front, Qualcomm is expected to earn $3.60 a share in fiscal 2000, putting the stock at somewhere near 40x forward estimates. But remember, this is a company that has proven analysts too conservative many times in the past. In addition, Qualcomm's inclusion in the S&P 500 and its subsequent secondary offering gave the company roughly $1 billion worth of cash, plenty of fertilizer to grow its business either organically or through acquisitions.

If the fantasy of Qualcomm shareholders becomes reality with CDMA becoming the next generation wireless communications standard, then this may just be the tip of the proverbial iceberg for Qualcomm's profits. In short, it's certainly worthwhile for investors to dial in on Qualcomm and investigate further.

-- By Paul Larson
(TMFParlay@aol.com)

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