New Trade $QCOM – Stock in a Box

by Enis January 31, 2013 11:55 am • Commentary

I laid out my directional thoughts on QCOM in the Name That Trade post yesterday.

Following QCOM’s earnings results last night, Dan had this to say in the Morning Word:

Last night QCOM reported results and guidance that appeared to be a bit of an outlier when you consider some of the recent data points from their customers & competitors.  The company had a meaningful beat in Q4, posting record quarterly profits and guided for Q1 above consensus.  The stock is up over 6% in the pre-market, testing levels not seen since last April.  QCOM is one one of the few large cap tech stocks to not only beat and show very healthy earnings and REVENUE growth, but to also guide higher.

QCOM has been on my radar since I placed a couple bullish trades in the name in mid December, and since closing them when the stock was a bit higher than here I have been waiting for a pull back to get long exposure again.  What strikes me most about the stock right here is that they are bucking certain trends that are hurting other mobile chip-makers while appearing to be a very unique value play.

As of last night, the company has ~25% of their market cap (~$109B)  in cash (~$28b) and no debt, compared to INTC that has a $106b market cap, ~$22b in cash and $13.4b in debt.  QCOM is expected to grow earnings and sales in 2013 at 11% and 20% respectively, vs INTC who analysts expect earnings to decline 10% on a 1% sales increase. QCOM trades at 14x 2013 estimates vs INTC at 11x.  Seems like a fairly obvious choice btwn the 2 mega-cap semiconductor companies   INTC is spending billions on building factories while QCOM spends on R&D to keep their lead in mobile.   Both company’s have monster share buy backs, while QCOM’s 1.57% dividend yield is chump change to INTC’s 4.2%, but I wouldn’t expect a company with QCOM’s growth profile to be so generous on that front as they still see ample growth opportunities.

I wouldn’t be chasing QCOM up above $67 and $68 should serve as serious resistance, but any weakness on a broad market decline I think you load the boat at $65 and ride QCOM’s strong execution in a difficult market .

I agree that QCOM is best in breed.  But in a broader landscape that has been tough for tech, I don’t expect QCOM to break out to 10 year highs above 69.  With that in mind, here’s my trade:  

Trade: QCOM ($66.50) Bought the Apr 70 / 65 / 60 put fly for $1.50
  • Bought 1 Apr 70 put for 4.68
  • Sold 2 Apr 65 puts at 1.92
  • Bought 1 Apr 60 put for 0.66

Break-Even on Apr Expiration:

  • Profits between 68.50 and 61.50, with max profit of 3.50 with stock at 65
  • Losses of up to 1.50 with stock between 68.50 and 70, and between 60 and 61.50.  Max loss of 1.50 at 60 or below or at 70 or above.

Trade Rationale:  This is not a trade that will gain much value in the next few weeks.  Rather it’s a long-term trade that will only appreciate gradually over the next month and a half, but as long as QCOM stays within the aforementioned range, it should appreciate gradually.  I have chosen to target the range around 65 (as opposed to the 62.50 level proposed in the Name That Trade post below), which seems appropriate after last night’s earnings beat.

Most importantly though, this trade will require PATIENCE.  I view it as a low-risk way to take advantage of a strong blue-chip performer in a weak sector.



Original Name That Trade Post on Jan 30th, 2013 at 3:32 pm:  $QCOM Rangebound?

QCOM reports Q4 earnings after the close.  Dan laid out the bullish thesis on QCOM back in December, when he bought a call calendar, and then an outright call spread.  In the original post, here is what he wrote:

AAPL represents about 6% of QCOM’s sales; while an important customer, not exactly the main driver for a company that analysts expect to grow earnings and sales 16% & 23% respectively in 2013.  The company has a stellar balance sheet, with 26% of their $102 billion market cap in cash and no debt, has a 1.67% dividend yield and an existing $4 billion share repurchase program (about $2.6 Bil remaining) announced in the first half of 2012.

Given what appears to be one of the strongest growth profiles in all of large cap tech, at a fairly reasonable price, trading at 14x next years expected earnings, you would expect analysts to be as bullish as they are: 42 Buys, 4 Holds and only 2 Sells with a 12 month price target of $73.75, or about 24% higher than current levels.

Dan made a nice profit on both of those trades as the stock rallied back to 65, but has since stalled as concerns over AAPL and the handset ecosystem have trumped the broader market strength.

What stood out to me in QCOM is that the stock has been stuck between 57.50 (green line) and 65 (red line) for more than 6 months now:

[caption id="attachment_22165" align="alignnone" width="626"]1 year QCOM chart, Courtesy of Bloomberg 1 year QCOM chart, Courtesy of Bloomberg[/caption]

The technicals indicate a rangebound situation.  But in addition, the fundamental factors seem to be mixed as well:

  • This is a relatively cheap growth story (14x P/E for a 15% growth rate), which suggests limited downside potential
  • The hardware space, led by AAPL, has had a bit of a growth slowdown in the past 6 months, which could limit the upside as well
  • It’s a $100 billion market cap with $26 billion in cash and no debt, so business volatility has less of an impact than on a more levered balance sheet

Put it all together, and a range trade in QCOM seemed like a decent risk/reward bet.  I considered the Apr 67.5 / 62.5 / 57.5 put fly for $1.40, which would be profitable if QCOM closed on Apr expiry between 58.90 and 66.10, a reasonable range given the technical and fundamental backdrop.  I even thought about the Feb16th 67.5 / 62.5 / 57.5 for about 1.90, which would be profitable by Feb 16th expiry if the stock closed between 59.40 and 65.60.  But at the end of the day, I decided that I might do the Apr trade after earnings, since the trade likely only moves 15-20 cents tomorrow if QCOM is close to unchanged.