1. QUALCOMM
    2.  (Nasdaq: QCOM)
    Closing price 9/24/01: $47.60
    52-week range: $42.60 - $107.81

by Roger Blain (TMF Luck)

[edited on Sept. 27, 2001, to include an 11% discount rate as well as 5%]

When QUALCOMM is mentioned as a potential investment, most people I talk to have no idea what the company actually does. Briefly, the company owns most of the intellectual property rights for CDMA (code division multiple access), a major technology for so-called 3G, or third generation, mobile communications. Though the company has announced a lot of good news recently, the overall sentiment of the wireless  industry is pretty negative. Based on the recent price declines in the industry and for the company, I wondered whether the stock at current prices -- the mid-to-high $40s -- would be a good value. 

For this exercise, I used a spreadsheet to employ the valuation methodology developed by Benjamin Graham many years ago that attempts to understand the intrinsic value of a company. Basically, in order to calculate the intrinsic value, I need the current earning estimates, my assumption of the EPS growth rate for the future, and a reasonable guess of what the discount rate should be. Value Line tells me that they think the growth rate will be around 29% for the next few years, and I think that a 5% discount rate is pretty reasonable assumption. So, using a discount rate of 5% and a growth rate of 30% results in an intrinsic value of  $63.29. Changing the growth rate to 25% to provide a range of prices, I get an intrinsic value of $54.05.

Based on this low-risk 5% assumption, QUALCOMM is valued at its latest price less than its intrinsic value. But it's possible that a 5% discount rate might be too low for the U.S., even in a downturn, though it might not be for a deflationary, negative interest economy like Japan's over much of the last 10 years. If you raise the discount rate to 11%, Qualcomm today appears overvalued by 50%-100%:

        Earnings  Growth Discount Graham 
Year  Per Share Rate   Rate     Intrinsic Value
2001     $1.05   30%    5%       $63.29
2001      1.05   30%   11%        28.77
2001      1.05   25%    5%        54.05
2001      1.05   25%   11%        24.57
                            
2002      1.30   30%    5%        78.36
2002      1.30   30%   11%        35.62
2002      1.30   25%    5%        66.92
2002      1.30   25%   11%        30.42

So you see, much of whether a stock is over or undervalued depends on your assumptions about at least two things that are very hard to predict: future growth and discount rate. Not only that, but once we determine a fair value for a stock, it's rare that the market presents us with an opportunity to buy at the perfect price.

Qualcomm? It all depends on your assumptions. I think a lower discount rate -- more towards 5% than 11% -- may make sense, and based on the many qualitative factors in its favor, the more I can argue that Qualcomm is fairly or even undervalued. 

More resources:
 Post of the Day: Long Means Long
Post of the Day: Come on Over to the Supply Side
QUALCOMM Technology FAQs

Roger Blain (TMF Luck) enjoys learning about valuation. He owns shares of Qualcomm, as his profile reveals. 

  1. H&R Block
    2.  (NYSE: HRB)
    Closing price 9/24/01: $36.21
    52-week range: $15.66 - $39.30

By Ann Coleman (TMF AnnC)

Talk about a growth business! Last year H&R Block(NYSE: HRB) prepared one out of seven income tax returns in this country. Does anyone doubt that continuing tax code complexity will drive more business its way? This is not a company that has been hit hard by the recent market slump. On the contrary, it has been one of the few bright spots in a dismal year, rising 120% so far. H&R Block's chart is almost a perfect mirror image of the Nasdaq over the past 18 months. The company's recent success stems from its three-year push to combat the highly seasonal nature of its business by branching out into home mortgages and other related financial services including financial planning. While none of the new divisions comes even close to rivaling the core tax preparation business, they are showing some early signs of success.

One valuation method is to look at a company's price-to-earnings ratio (P/E) over its growth rate, or PEG ratio. (This is a valuation tool that we advise using carefully and never by itself.) If the PEG is less than one, the stock is undervalued; if over one, overvalued. Despite H&R Block's soaring stock price, its P/E has not gone into the stratosphere thanks to steadily rising earnings. Recently, H&R Block's P/E has been in the low 20s, quite a bargain for a company that is has been growing earnings at a 30% annual rate over the last five years. Whether that growth will continue is anyone's guess: Analysts are projecting a five-year growth rate of 14% which would make the current P/E a bit high.

According to PEG, then, right now the company's stock is undervalued if it has a 30% growth rate and P/E of 20 (PEG < 1). But if its growth is slowing to 14%, it's overvalued (PEG > 1). 

Although a recession could put a temporary crimp in the company's plans to branch out, with the very solid tax prep business to get it though a rough spot, it should be in a position to grow very quickly when the recovery comes.

More resources:
HRB Investor Relations
H&R Block Rules Tax Season
Five Companies Waiting for Your Rebate

Ann Coleman owns a few shares of H&R Block, but takes pride in the fact that she has always prepared her own taxes. Other stocks she hopes to pay taxes on one day are listed in her personal profile.

  1. Disney
    2.  (NYSE: DIS)
    Closing price 9/24/01: $17.90
    52-week range: $15.50 - $41.94

By Rick Aristotle Munarriz (TMF Edible)

M-I-C... See your shares swoon.
K-E-Y... Why? Because Wall Street doesn't like you.

But don't bet against the M-O-U-S-E. The 1990s were hailed as the Disney(NYSE: DIS) decade. From the dawning of The New Golden Age of Animation that delivered box office classics like Beauty & the Beast and The Lion King to the ramping up of its theme parks and resorts to its timely acquisition of Capital Cities, which added ABC and ESPN and more cable properties to the company's entertainment portfolio, Disney arrived. Shareholders didn't. Over the past 10 years, revenue has more than quadrupled while the stock hasn't even doubled.

This is no Mickey Mouse operation. But it's true that Disney is suffering on most fronts right now. Traffic at its iconic theme parks and resorts is slipping. The weak advertising market isn't doing its broadcasting arm any favors. Those Winnie the Pooh plush toys aren't even selling as well as they used to.  

While Disney should continue to hold up well in the home video and DVD markets and its cable TV business is subscriber-dependant and relatively recession-proof, the next few quarters might be difficult for Disney. However, the company has always bounced back.

When times are ripe, Disney is a cash flow beast with an entertainment empire that only continues to grow. At a price unseen since 1996, it's the newest shareholders that might be singing Zip-a-dee-do-da all the way to the bank.

More resources:
 Disney's Kingdom Losing Magic
"Pearl Harbor" Attack Falls Short 

Rick Aristotle Munarriz (TMF Edible) sings the Mickey Mouse Club song each morning. He owns shares of Disney, which his spiffy profile discloses.

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