What better stock to own right now than one that's positioned for organic
growth regardless of what happens in Europe? Based on its earnings report
released late Wednesday, Qualcomm (NASDAQ: QCOM ) fits the bill. The company
reported better-than-expected results on both the top and bottom lines, with
revenue rising 36% and net income jumping by about 22%. It also raised its
outlook for 2012, highlighting the most important aspect of the Qualcomm story:
The company is in one of the sweetest spots of the global economy, since it is
positioned to benefit from rising smartphone sales worldwide, the adoption of
wireless 3G technology in emerging markets, and the upgrade to next-generation
4G in the developed world. And unlike its semiconductor competitors Texas
Instruments (NYSE: TXN ) and Broadcom (NASDAQ: BRCM ), it isn't burdened by
exposure to personal computer sales. With these trends putting the wind at its
back, Qualcomm looks good on both a short- and longer-term basis. In the short
term, the company appears insulated from global economic trends. If the growth
outlook improves, Qualcomm wins because consumers have more cash available to
upgrade their mobile devices. But even if the growth outlook turns sharply
lower, Qualcomm can still come out on top, because it's positioned to benefit
from one of the most important growth themes in the global economy. There's
also the longer-term trend of mobile devices moving from being a luxury to a
staple for most consumers, which provides an additional bulwark against slower
economic growth. Not least, the company is part of the Apple (NASDAQ: AAPL ) and
Google (NASDAQ: GOOG ) ecosystems, which enables it to benefit from the
incredible demand for the iPhone 4S and the continued strength in Android-based
smartphones. These attributes can be seen in both the company's 2012 earnings
estimates – which have held steady in the past 90 days (falling from $3.53 a
share to $3.47 a share) – even as the economic outlook has deteriorated. On a
longer-term basis, Qualcomm offers some key attributes that go a long way toward
identifying a winner. A top company should be innovative, it should make
products that people can't live without, and it should have rising market
share – all of which indicate a long runway for future growth. In terms of
metrics, the ideal company should have robust free cash flow, high profit
margins, and a strong return on equity, demonstrating that it is in a position
to capitalize on the potential of this runway. Qualcomm meets these criteria in
spades. All of this is reflected in a valuation premium for QCOM shares, but it
isn't as high as you might expect given the strength in the company's
underlying business. According to Nasdaq's website, Qualcomm shares trade at
16.6x forward earnings with a price-to-earnings-to-growth ratio of 1.08. The P/E
ratio of 16.6 is about 30% higher than the broader market, but with that price
comes the lack of down-cycle risk – making it a value at a time of extremely
elevated headline risk. Still, QCOM is only modestly ahead the market for the
past three years, even though it has outperformed it by a more substantial
margin on a longer-term basis. If the company continues to deliver strong,
steady growth, we could see this gap begin to widen once again: Putting it all
together, Qualcomm belongs in the category of stocks that are "safe" to own,
due to its positive long-term story and likelihood of outperforming if bad news
knocks the broader market south once again. In a market that's flat to higher,
QCOM looks set to challenge its high just short of $60 reached in March and July
of this year. Play for a breakout (with stops) and consider this a top candidate
if the market gives us another chance to buy the dip before year-end. As of this
writing, Daniel Putnam did not own a position in any of the aforementioned
stocks.
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