Earnings Preview: Qualcomm Inc.

Qualcomm Inc.(QCOM) is slated to release its second quarter 2011 results on Wednesday, April 20, after the closing bell. The current Zacks Consensus Estimate for the second quarter is pegged at 72 cents, representing an annualized growth of 36.60%.

With respect to earnings surprises over the trailing four quarters, Qualcomm has outperformed the Zacks Consensus Estimate in all the four quarters. The average earnings surprise was a positive 7.00%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First Quarter Performance

On January 26, 2011, Qualcomm reported its first quarter 2011 financial results. Quarterly net income on a GAAP basis was $1,170 million or 71 cents per share compared with a net income of $841 million or 50 cents per share in the year-ago quarter. Adjusted earnings per share (EPS) of 69 cents surpassed the Zacks Consensus Estimate of 63 cents.

Total revenue was $3,348 million, up 25% year over year. Total revenue also beat the Zacks Consensus Estimate of $3,198 million. The growth in revenue was primarily driven by increased demand for smartphones and data-centric devices.

Agreement of Estimate Revisions

In the last 30 days, out of the 10 analysts covering the stock, 1 analyst increased its EPS estimates for the second quarter of 2011 while none reduced their estimates. Similarly, for the third quarter of fiscal 2011, out of the 9 analysts covering the stock, 1 analyst increased its EPS estimate but none decreased it.

For fiscal 2011, in the last 30 days, out of the 12 analysts covering the stock, 1 analyst increased its EPS estimates and 1 analyst decreased its estimates. Likewise, for fiscal 2012, out of the 12 analysts covering the stock, 2 analysts increased their EPS estimates while 1 slashed its EPS estimates.

Most of the analysts remained neutral on Qualcomm’s stock as we believe that most of the positives are already reflected in the current valuation leaving little room for above market gain. Furthermore, the company is currently trading higher at the 52-week price trend.

Magnitude of Estimate Revisions

During the last 30 days, the Zacks Consensus Estimate was in line with the current estimates of 72 cents for the second quarter of 2011 and 61 cents for the third quarter of 2011. Similarly, for fiscal 2011, the Zacks Consensus Estimate was in line with the current estimates of $2.70. However, for fiscal 2012, the Zacks Consensus Estimate jumped 3 cents from $2.96 to $2.99.

Earning Surprises

In the previous quarter, Qualcomm reported EPS of 69 cents, which beat the Zacks Consensus Estimate by 6 cents. The current Zacks Consensus Estimates for the ongoing quarter contains a 4.17% upside potential while for the upcoming quarter, it is also reflecting a 1.64% upside potential (essentially a proxy for future earning surprises). Similarly, for fiscal 2011 and 2012, the Zacks Consensus Estimate upside potential is 1.11% and 2.68%, respectively.

Our Recommendation

We believe the company’s record-high earnings,strong balance sheet and solid management outlook for the current fiscal year will act as positive catalysts in the long run. Moreover, the gaining popularity of smartphones and tablets will further drive the stock upward.

However, stiff competition from formidable rivals like Broadcom Corporation (BRCM) and Texas Instruments Inc. (TXN) as well as from low-cost competitors like Mediatek of Taiwan and VIA Technologies of China will act as headwinds going forward.

We maintain our long-term Neutral recommendation on Qualcomm. Currently, Qualcomm has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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