Qualcomm in the Chips

Qualcomm Inc. (Nasdaq: QCOM) has been a big beneficiary of the smartphone sales surge. The IU25 Index company supplies semiconductors to key smartphone makers, including Apple Inc. (Nasdaq: AAPL), Nokia Corp. (NYSE: NOK), and Samsung Electronics Co. Ltd. (Korea: SEC). Its revenue for the fiscal year that will end in September is expected to rise 29% from the previous year, to $19.3 billion.

Recently trading at $68.33, Qualcomm shares are up 25% this year and have rebounded 48% since hitting a low of $45.98 in August. The stock trades at 18.1 times the fiscal 2012 consensus EPS estimate of $3.77, in line with the expected growth rate of 17.8%, and 16.3 times the fiscal 2013 consensus of $4.19.

A bullish outlook for the overall smartphone sector spurred Credit Suisse last week to raise its Qualcomm price target from $70 to $80. For 2012, the firm looks for global smartphone shipments to grow 46% to 688 million units, with demand being driven by migrations to 4G LTE in developed markets and 3G in emerging markets.

According to the research firm Wireless Intelligence, 3G connections in emerging markets jumped 45% in the quarter that ended in December. In China, the number of 3G subscribers is estimated at 144 million, or just 14% of all mobile phone users there, so there is still plenty of upgrade potential. Gartner Inc. says China will soon become the world's leading smartphone sales market.

Next year, Credit Suisse sees global smartphone shipments growing by a still-respectable rate of 29%, or 885 million units. By 2015, the firm sees global shipments topping 1.17 billion.

In the quarter that ended in December, Qualcomm MSM chipset shipments grew 32% from a year earlier, to a record 156 million. In February, the company announced a Pro version of its Snapdragon S4 MSM8960 processor, which is optimized for the most advanced operating systems, including the upcoming Windows 8 system from Microsoft Corp. (Nasdaq: MSFT). The processor is expected to reach the market by the second half of this year.

Morgan Stanley, which has a $78 price target on Qualcomm, is optimistic about the shift to 4G LTE, because it means a richer revenue mix. Qualcomm’s 4G chips cost as much as 50% more than its 3G chips. With the launch of several LTE smartphones (including the highly anticipated iPhone 5) expected during the next six months, Qualcomm estimates that a third of its chip shipments will be of the LTE variety by the end of September. Morgan Stanley’s fiscal 2013 EPS estimate for Qualcomm is $4.50 -- well above the consensus estimate.

Beyond handsets, the explosion in various connected devices (including tablets, e-readers, and handheld gaming units) is another growth driver for Qualcomm. Some analysts see nonhandset mobile broadband device shipments growing at a CAGR of 40% through 2015.

Qualcomm is scheduled to report results Wednesday for its fiscal second quarter, which ended in March. The company expects to report EPS of 91 to 97 cents (the consensus is 96 cents) on revenue of $4.6 billion to $5 billion (the consensus is $4.84 billion). For the quarter, FBR Capital’s channel checks indicate that revenue tracked to the upper half of the guidance range, because of strong smartphone sales. Sterne Agee says Qualcomm may have gotten a bit of a revenue boost last quarter from the fact that its chips are in the new 4G LTE iPad. The firm expects multiple new handsets using Qualcomm chips to come to market this quarter.

Early last month, Qualcomm announced a $4 billion stock repurchase program in addition to the $948 million remaining on the previous $3 billion plan. It has $22 billion in cash and marketable securities on the balance sheet.