A Tech Star from the ‘90s Shines Again

06/05/2008 12:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of The DRIP Investor, says cell phone giant Qualcomm has made a quiet comeback and it’s ready to take off once more.

At this juncture, I would not be bashful about putting money into the market, especially in such attractive tech names as Qualcomm (Nasdaq: QCOM).

In the late 1990s, when technology stocks ruled the market, few stocks could match the returns put up by Qualcomm. Indeed, in 1999, these shares went from a split-adjusted price of less than $4 to a high of more than $92.

But the party came to a screeching halt over the next three years, as technology stocks of all stripes got killed in the tech sell-off. These shares fell below $12 per share in 2002. Qualcomm rebounded in 2003, but the stock has been stuck in a trading range for the last four years.

However, that looks like it is about to end. The stock recently moved to a new 52-week high and is setting its sites on its 2006 high of $53. Strong earnings and greater visibility on some litigation matters should pave the way for solid gains in the second half of 2008.

Qualcomm generates 90% of its revenue from cell-phone chipsets and license royalties paid by users of its intellectual property. Qualcomm’s chips are used in mobile phones and wireless infrastructures around the globe. Growth here should remain strong as networks convert to third-generation technology and emerging markets expand and upgrade their infrastructure.

The company’s most profitable segment is intellectual-property licensing. Qualcomm has had some uncertainty in this area as a result of a feud with Nokia (NYSE: NOK). The disputes stem from Nokia’s shipping handsets without paying royalties.

The good news is that the two companies have agreed to consolidate a host of lawsuits into one case to be heard later this year. Hopefully a decision by year-end will lift some of the clouds that have hung over these shares.

Despite the Nokia issues, Qualcomm has continued to put up good growth numbers. Per-share earnings excluding special items and stock-based compensation rose 23% in fiscal 2007 (September) and 14% in the six months ended March 31st. For fiscal 2008, the consensus earnings estimate shows 5% growth, a rather modest target for the company. Qualcomm currently pays a quarterly dividend of 16 cents per share. The stock’s current yield is 1.4%.

At 23x the fiscal 2008 earnings estimate of $2.11 per share, these shares are not cheap. However, that multiple is significantly lower than Qualcomm’s historical P/E ratio. The stock has the potential to put on significant gains with a resolution in the Nokia issue.

Technology stocks should remain among the market’s leading sectors, and Qualcomm
offers an excellent play in the group. Investors willing to endure above-average price volatility should buy these shares now. (The stock closed above $48 Wednesday—Editor.)

The company’s DRIP permits initial purchase directly. Minimum initial investment is $500.

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