Morgan Keegan upgraded Qualcomm Inc. (Nasdaq: QCOM) to outperform from market perform, a day after the CDMA chip maker reported strong quarterly results and boosted its fiscal 2011 outlook.
On Wednesday, Qualcomm reported a quarterly profit of $1.2 billion or 71 cents a share, up from $0.84 billion or 50 cents a share last year. Adjusted earnings were $1.34 billion or 82 cents a share. Revenue rose to $3.35 billion from $2.67 billion. Both earnings and revenue came in ahead of Wall Street estimates. Street had expected profit of 72 cents a share on revenue of $3.20 billion, according to analysts polled by Thomson Reuters.
Qualcomm expects second quarter adjusted profit of 77 cents to 81 cents a share and revenue of $3.45 billion to $3.75 billion, while Street predicts profit of 68 cents a share on revenue of $3.12 billion.
The company increased its fiscal 2011 adjusted earnings guidance to a range of $2.91 to $3.05 a share from previous forecast of $2.63 to $2.77 a share. The company also raised 2011 revenue outlook to range of $13.6 billion to $14.2 billion from previous range of $12.4 billion to $13.0 billion.
Analyst Tavis McCourt said the company's first quarter results showed substantial evidence that the industry's transition to smartphones is finally offsetting the substantial average selling price (ASP) compression in feature phones and the baseband modem business, which had caused choppiness in results at Qualcomm through mid-2010.
McCourt sees no reason to believe that ASPs for CDMA licenses should decrease anytime soon as the industry is increasingly shifting towards higher ASP smartphones in the developed world, and transitioning from 2G devices to 3G smartphones in emerging markets. Tablets just add to the outlook for higher license revenues.
Over the longer term, we would still expect Qualcomm's license ASPs to decrease, but this elevated level may stick around for a few more quarters, which has substantial positive impact to EPS, the analyst wrote in a note to clients.
We expect over 20% year-over year revenue growth to persist for at least the next 4 quarters, with 20%+ EPS growth at least until September this year, said McCourt, who raised the price target of Qualcomm to $61 from $52.
McCourt also raised fiscal 2011 non-GAAP EPS estimate to $3.06 a share from $2.73 a share and revenue estimate to $14.4 billion from $13.3 billion.
However, the analyst said Qualcomm still faces a headwind in fiscal 2012 with the Mirasol commercialization, which he expects to add 10 cents a share of depreciation expense, but if ASPs remain elevated, this could become a rounding error.
Other analysts have also increased their 2011 profit estimates of Qualcomm as they believe it is the significant beneficiary of the upgrade to 3G/4G from a license perspective and strong smartphone adoption.
FBR Capital Markets analyst Craig Berger, who has an outperform rating on Qualcomm stock, raised his 2011 pro forma earnings estimate to $3.20 a share from $2.85 a share.
We remain positive on QCOM for 2011 given our view that Qualcomm Technology Licensing (QTL) units will eventually grow beyond 2 billion, given near-term opportunities with Apple (iPhone and iPad), Nokia, and other Android-based smartphones, and given Qualcomm's respectable capital returns, Berger said.
Berger raised his price target on Qualcomm stock to $60 from $55.
Meanwhile, Adam Benjamin, an analyst with Jefferies raised his 2011 pro forma EPS estimate to $2.99 a share from $2.73 a share.Street predicts profit of $2.78 a share on revenue of $12.78 billion for 2011.
We recommend investors buy shares as we believe QCOM is the most significant beneficiary of the upgrade to 3G/4G from a license perspective and its dominant product roadmap well positions its chip business to take advantage of the mix shift to high end processor intensive handsets,
Benjamin wrote in a note to clients. Benjamin has a buy rating and price target of $68 on Qualcomm stock.
Shares of Qualcomm were up $3.01, or 6 percent, at $54.87, in Thursday's pre-market trading on Nasdaq.