Qualcomm's Headed the Wrong Way

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: Qualcomm (Nasdaq: QCOM  ) . Is the executive team of this wireless telecom company doing all it can to earn you outsized returns?

Foolish facts

Metric

Qualcomm

CAPS stars (out of 5) ****
Total ratings 2,083
Percent bulls 94%
Percent bears 6%
Bullish pitches 270 out of 293
Highest rated peers Digi International, Spirent Communications, Network Engines

Data current as of Jan. 23.

Qualcomm is the inventor of the CDMA technology upon which Verizon's (NYSE: VZ  ) wireless network is based. So it should be no surprise that analysts believe Big Red's edition of the iPhone will be based on Qualcomm technology, joining a veritable army of Android devices already using the company's chips.

"The one certainty investors can bank on is that small, mobile, connected device demand will continue surging ... And there's one company that is perfectly positioned to profit immensely from that certainty," wrote my Foolish colleague Eric Bleeker in announcing Qualcomm as a buy for the Fool's "11 O'Clock Stock" portfolio.

Management overview

Executive

Years

Cash Compensation

Shares Owned

Dr. Paul Jacobs, Chairman and CEO 21 $4,524,144 1,479,088
Steven Altman, President 22 $2,035,014 132,088
William Keitel, Chief Financial Officer 15 $1,620,010 8,371

Source: Capital IQ, a division of Standard & Poor's. Data current as of Jan. 23.

Good news, Qualcomm's top executives have a lot of history with the company. CEO Jacobs also controls more than $75 million in stock. (Though, to be fair, that amounts to just 0.09% of the shares outstanding.) As a group, insiders own 1.42% of the company.

Management analysis versus competitors and peers

Company

Insider Ownership

Gross Margin

ROC*

ROE**

Broadcom (Nasdaq: BRCM  ) 0.24% 50.8% 10.7% 19.9%
Intel (Nasdaq: INTC  ) 0.05% 66.1% 20.8% 25.6%
Nokia (NYSE: NOK  ) 0.07% 31.9% 8.5% 16%
Qualcomm 1.42% 68% 9.6% 15.8%
Texas Instruments (NYSE: TXN  ) 0.30% 53.6% 27.1% 29.9%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Jan. 23.
* Return on capital.
** Return on equity.

Anyone else surprised by the data in this table? I'd expect the high gross margins that result from Qualcomm's royalty business to drive industry-leading returns on capital and equity. Yet capital-intensive Intel and Texas Instruments outperform Qualcomm in both areas.

Looking at the historical trend, management's record in all three metrics has deteriorated in recent years. Gross margin checked in at 71% in fiscal 2006. ROC came in 13.8% and ROE 20.1% the same year. While this decline in returns corresponds with Qualcomm growing its lower margin (relative to royalties) chipset business, the company has also moved into non-profitable areas like its Flo TV misadventure that ruined shareholder capital. I'd advise taking a closer look at what's behind the downtrend before committing new investment dollars to this stock.

Do you agree? Disagree? Let us know what you think about Qualcomm in the comments box below. You can also recommend other stocks for me to evaluate by sending me an email, or replying to me on Twitter.

What will be this year's top stock? We've got a good idea. The Motley Fool has created a brand-new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Interested in more info on the stocks mentioned in this story? Add Broadcom, Intel, Nokia, Qualcomm, or Verizon to your watchlist.

Intel is a Motley Fool Inside Value pick. Motley Fool Options has recommended buying Intel calls. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 

The Motley Fool owns shares of Qualcomm, Texas Instruments, and Intel, in which it also has a call options position. The Fool is also on Twitter as @TheMotleyFool and its disclosure policy always manages to make ends meet.


Read/Post Comments (1) | Recommend This Article (3)

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  • Report this Comment On January 24, 2011, at 1:00 PM, JeffreyHF wrote:

    FLO "ruined shareholder capital?" Apparently you are ignorant of their sale of the FLO spectrum to AT&T for $1.93 bil, to be closed this Fall. That will result in FLO reward shareholders with a large profit on the entire FLO operation. Not everything in print has value.

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