$QCOM Q3 Earnings Cheat Sheet

by Enis November 6, 2013 10:52 am • Commentary

Event:  QCOM reports its Q3 earnings today after the close.  The options market is implying about a 4% one day move, which is slightly below the 4 qtr avg of about 4.25% and the 8 qtr avg of about 4.75%.

Sentiment:  Wall Street analysts are quite positive on the stock, with 38 buys, 9 holds, and only 2 sells, and an average 12 month price target of around $75.  Short interest is at 1.3% of float, and QCOM is a top hedge fund holding.  The stock is near a 10 year high, but has only returned 11.5% in 2013.

Options Open Interest:  Open interest is very heavily skewed towards calls (especially for a company of this size), at around 1.7 to 1 calls vs. puts.  The past 1 month volume has been similarly skewed towards calls.  The Nov15th 70 and 72.5 calls have the most open interest of near-dated maturities.  The Jan14 72.5 calls and the Jan15 72.5 calls have the most open interest of the farther dated maturities.

Price Action / Technicals:  QCOM has not been able to cleanly break out above its early 2012 highs, failing after a brief move higher in September, though it’s back above the $69 level today:

QCOM daily, 50 day ma in pink, Courtesy of Bloomberg
QCOM daily, 50 day ma in pink, Courtesy of Bloomberg

The earnings event tonight is likely to be the catalyst for a clean breakout above $70, or a push back into the $65 to $69 area that has seen so much price action in 2013.  The stock’s all-time high is exactly $100, set in January 2000, but the stock only traded above $70 for a few months during the tech bubble.

Volatility:  30 day implied vol ahead of earnings is at its lowest level in the past year:

QCOM 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro
QCOM 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro

Implied vol in QCOM has generally fallen into the high teens after the earnings report.  Since the stock has not moved much over the past few months, options traders have priced in a slightly lower expected move than normal this time around.

Our View:  QCOM is a stock that we have liked since early in the year.   Here is what Dan wrote back in January:

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.

Not much has changed since then, with the company executing well for much of the year, though the stock price performance has been relatively disappointing in the context of the broader market’s euphoria. However, QCOM still has secular tailwinds behind it.  The stock has not been able to cleanly clear resistance, but a solid report could give it the final push it needs.

For those looking for news on share buybacks it is important to note that back in early Sept the company announced a new $5 billion share repurchase to replace the prior that was completed.  Also the company will be holding their annual analyst meeting on Nov 20th, which some investors may view as a potential positive catalyst for the shares.