Fundamentally Furloughed

Absolutely love your analysis on these companies, keep up the good work (I mean training)

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Great posts, really insightful :ok_hand:t5:

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Really useful analysis @jcksmith850

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Thanks for all the great feedback everyone :tada:

I’m glad you enjoy the pieces. I’m having a think what to write about today and answering any questions. Hopefully my analysis gets better with time, I’m learning a lot as I go.

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Could you do one on Shell? Interested to hear everyone’s perspective following the dividend cut

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Royal Dutch Shell - RDSB (Hold)

I’ve been looking at the feedback on my pieces and there are some improvements I can make. Hopefully, it makes these write-ups more useful for everyone!

As requested by @SpyrosL , my views on Royal Dutch Shell. Shell has been an investment stable for countless years, in fact, it is still the biggest contributor to the FTSE 100 index.

First thing I want to cover off is RDSA versus RDSB. You’ll see that Shell is not the biggest single ticker in the FTSE 100, but it shows up twice.


From LSE Market Capitalisation

I am focusing on RDSB for a reason, firstly this is the “British” side of the business meaning it follows UK tax laws. This is important as it means you won’t get any of your dividend withheld. RDSB pays in British Pounds, controls 43% of Shell, has voting rights, but during bankruptcy, you do not have access to assets until everyone else has taken what they need.

RDSA, on the other hand, is based in the Netherlands and pay dividends in Euros, however, Dutch laws mean 15-25% of the dividends are withheld for tax reasons. This share class controls 57% of the company but it comes with no voting rights. In the event of bankruptcy, you get immediate access to assets.

share class comparison

No matter which class you pick, the payout is the same when it comes to dividends. I’ve seen a few places use the share class interchangeably, so make sure you pick the one which is right for you.

What Does Shell Do?


From Royal Dutch Shell Investor Portal

Before we dive in, Shell is an extremely big company. It’s worth taking a step back to first understand what we are even talking about. What does Shell even do?

To help keep us focus Shell offers a nice way to group the business into four segments.


From Royal Dutch Shell Investor Portal

Integrated Gas includes producing, marketing, trading LNG and GTL products. This also includes and manages its New Energies portfolio. This is anything related to being more carbon neutral. We will be touching on this business line a lot.

The acquisition of BG accelerated our growth strategy by a decade, and helped make our Integrated Gas business a cash engine.

Upstream explores for and extracts crude oil, natural gas, and natural gas liquids. It also markets and transports oil and gas, and operates the infrastructure necessary to deliver them to market. Think deep-sea drilling, and shale.

Downstream looks at different oil products and chemicals activities. This line also trades and refines crude oil. Think gasoline, diesel, heating oil, aviation fuel, marine fuel, biofuel, lubricants, bitumen, and sulphur. You also have petrochemicals for industrial use.

Lastly, we have corporate activities. This is non-operating activities supporting Shell. Think treasury organisation, self-insurance, and central functions. If you ever break down each of the business line be aware of this little fact.

All finance income and expense as well as related taxes are included in the Corporate segment earnings, rather than in the earnings of the business segments.

Product Diversification

A $10 drop in the price of oil is a $6 million hit to their cash flow. Shell has a lot of risks related to the price of oil, and they have liabilities equal to their assets.


From Royal Dutch Shell Investor Portal

This means borrowing could be tougher for Shell, normally a cash flow rich company can brush this to the side. However, Shell’s expenditure is extremely high and they are not a very profitable company.


From Royal Dutch Shell Investor Portal

This could potentially increase the speed at which Shell moves to alternatives and renewable energy.

The risk being they have just taken an all-mighty hit to their revenue. While cutting the dividend and slowing any buybacks will reduce their outgoings it’s now going to be a significantly tougher squeeze for them.

The big issue in the world of oil right now (aside from Trump now threatening the Middle East to cut production of oil,) is the storage. We have an estimated 160 million barrels of crude oil at sea, with consumption cut and few companies accepting delivery this is an issue for anyone who is currently producing more oil or gas.

Compound this with the fact the 2019 results saw a 17.82% dip in revenue generated, an 82.75% dip in net income, and a 1.15% decrease in net profit margin, Shell was not in a strong position to have the pandemic hit them.

Dividend Cut For The First Time Since WW2

Let’s talk about the dividend cut and the controversial share buybacks of previous years.

Our cash flow from operating activities was strong compared with our industry peers, at $42.2 billion. We distributed more than $25 billion to shareholders: $15.2 billion in dividends , and $10.2 billion in share buybacks .
From Royal Dutch Shell Investor 2019 Highlights

This represents a 66% decrease in the dividend payout. However, this is absolutely a necessity for Shell right now.

Looking at the Shell financials, it’s clear why the dividends had to be cut by a third. If a $10 drop in the price of oil costs Shell $6 million in revenue, and we have lost roughly $40 since the start of the year ($66 to $25 now) then we are looking at a $24 million hit. This is not even taking into account the general reduction in the demand for their other products as well.

Overall, the energy sector is forecasted by GlobalData to face downward earnings revisions of 208% in 2020

Cutting the dividend by two thirds and stopping share buybacks will go a long way to cutting their expenditure. Given over 50% of their cash flow in 2019 was “reinvested” into keeping shareholders sweet.

What will this mean for the future of Shell’s share price without Shell bumping up the price?


From Google Finance

The share buyback program started in 2018 and they still have $10 billion left to buyback as per the original plan. This is very unlikely to carry on in the current climate, but this reduction in future share price “bumps” has hurt investor confidence.

We also have the Q1 2020 results to look over. It makes for some very sombre reading.

While cash flow has increased by 72% compared to last year, the earnings have dropped by 46%. Understandability they are now having to hoard cash and enter crisis mode.

What Is The Summary?


From Genuine Impact

A company with low profitability, a large number of liabilities and debt on their books which they are trying to use their cash flow to fight back against, a cheap investment compared to their cash flow as it’s highly distressed right now, and even at this price a weak outlook.

Looking To The Future


From Shell Energy Transition Report

The big take away here is the dominance of solar and wind, and the explosion of energy consumption in Asia in 2070.


From Shell Energy Transition Report

It’s disappointing to see Shell’s approach to being carbon neutral is counteracting their output and finding new ways to reduce their carbon consumption, rather than a focus on shifting their portfolio to renewables.

I was hoping to see more expansion with their wind farms and alternative renewable energy sources, however, Shell seems to be focusing on moving up the value chain and selling energy directly. For example their recharge stations in the UK. Currently, these are powered by wind farms but there have been mentions of using their own natural gas extracts, which they aim to get carbon neutral to avoid any bad stigma.

Why A Hold?

While the sell-side analysts see this as a cheap buy, and “too big to fail” I find them to be too optimistic and leaning on the future buybacks making a return.


From Market Beat

With a target price of 1,922.14p this is accounting for the dividend drag being reduced, and a spike in activity and sales once the lockdown ends. I have a more pessimistic outlook and don’t believe the pandemic will ease up as quickly as planned.

Also, the assumption that Shell will make faster strides into their alternative businesses, I feel other companies will also take the same action. Meaning the demand for their most popular revenue-generating products will dip faster than expected.

I agree with the lowest estimates of 1,500p per share. While the cost-saving measures and the end of lockdown will help the share price recover, this isn’t a long term investment for me. The slow pace of innovation, the fact they buy competitors with their war chest rather than attempting or experimenting with serious R&D stinks of a stagnant beast which is simply following market trends in a low-risk manner.

If I was holding onto Royal Dutch Shell, I would be planning my exit and moving my dividends into more exciting growth companies. I’d rather invest in an acquisition target of Shell than the beast itself.

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Enjoying the write ups, also be interested to hear your thoughts on Activision Blizzard :grin:

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I’m a fan of ATVI, so that would be an exciting one to write about.

Something for me to think about over the weekend, while I’m queuing up for the shops!

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Nice mate, thanks for this!

Feel a bit stuck with Shell atm as it is 10% of my portfolio…

At current share price I am sitting at about 20% loss and a dividend yield of about 4.3%

Even at these levels the dividend is somewhat attractive - have been debating whether to dollar cost average my position down or to stop any further investment.

May main issue at the moment is that most high income stocks have pressed pause on their dividends so I don’t think I have very attractive alternatives.

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@jcksmith850 really enjoying these write ups! Thank you for taking your time to make them

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Thanks @jcksmith850 I’d be interested in imperial brands. With the decline of cigarettes, their normal bread and butter, as far as I’m aware, and they still have a huge following, namely due to dividends? But is it viable to continue those with current circumstances and the effects on the lungs. I believe they have been diversifying into e cigs, and nictine products as well?

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+1 for imperial brands. As a smoker myself I always question whether to try to recoup some loses from my bad habit by holding imperial brands

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Activision Blizzard - ATVI (Buy)

Activision Blizzard is one of my favourite investments (and @userfy_123’s by the sound of it!) It’s a high growth, strong quality company, with growing reoccurring revenue, that appeals to a range of demographics. It’s a growing sector, and few companies are better positioned to take advantage of this.

Tomorrow, Tuesday 5th May, they will be announcing their first-quarter results. It would be easier to do some analysis after the quarterly results, but I have a strong long term view on ATVI.


From Google Finance

What Is Their Business?

ATVI describe themselves as a leading standalone interactive entertainment company. Who delight hundreds of millions of monthly active users around the world through franchises including Activision’s Call of Duty®, Spyro™, and Crash™, Blizzard Entertainment’s World of Warcraft®, Overwatch®, Hearthstone®, Diablo®, StarCraft®, and Heroes of the Storm®, and King’s Candy Crush™, Bubble Witch™, and Farm Heroes™. As someone who has played Call of Duty and Diablo, delight isn’t the word that comes to mind. Enough about my terrible gaming ability and onto why this is an exciting company.

The important piece to know here is, ATVI is four companies in one. You have the game publisher and developer Activision started in 1979, but these days best known for publishing Call of Duty (they don’t develop the game, it rotates between a few development studios.) There is the giant which is known as Blizzard Entertainment set up in 1991, who is best known for smash hits such as World of Warcraft, Starcraft, Overwatch, and Diablo. Then, we have King which was created in 2003, who rode the casual gaming wave (and continue to) with their never-ending, money-sucking, app Candy Crush. Finally, have Major League Gaming originally founded in 2002, which focuses on competitive gaming, MLG is the go-to location to watch top tier esports champions battle it out for cash prizes (to date they have paid out over $9.5m in cash prizes.)


From ATVI Q4 Powerpoint

Publishing games, where you bankroll development but in return, you get paid first, have a lot of control (if you want), control the distribution and sale price and control the IP. Additionally, for in-store microtransactions and additional services, you get even more revenue post-launch.

Developing games, where you have creative control, end-user engagement, can follow trends or even create new ones, and potentially create new IP if you have the distribution channels (which they do.)

Mobile gaming, with both King and Activision pushing more and more into the casual gaming experience, this gives them access to very desirable demographic, own income, spare time, actively seeing a short attention span ease to pickup distraction.

eSports hosting and team creation, where they rent venues to launch massive sponsorship backend events to see the best players around the world compete.

Own digital gaming distribution channel, with Battle.net they control even more of the user experience, pay less out to 3rd parties as they have their channel, and give them more control over their in-app purchases and digital sales.

Movies, physical merchandise, and other licence maximising activities through their studio arm. While this has been a bit quiet this could be a big step into more forms of media e.g. the Warcraft Movie.


From ATVI Q4 Financial Model

That graph is measured in millions. $5.4~ billion in bookings last four quarters, 409 million monthly active users over the final quarter. Let’s just say they are big.

What About Competitors?

I wanted to add in some comparisons to other companies to give you a feel for where they sit, these screenshots are from Genuine Impact.

Activision Blizzard

Take-Two

Electronic Arts

Ubisoft

Tencent owns a lot of developers and publishers as well (not just in China but globally), but they are a bit trickier to invest in. If you have access to the Polish exchange you might be interested in CD Projekt as well.

Financial Growth

Let’s stay focused on ATVI and it’s last earnings report. It’s worth noting that ATVI hasn’t announced any guidance changes since Q4. This likely means we are expecting positive results tomorrow. We have already seen a lot of digital and gaming related firms getting a strong boost in user numbers and spending due to national lockdowns. This will likely boost the revenue and engagement figures for ATVI too.

The expectation for Q4 was a dip in revenue, $1.6m compared to $1.8m a year ago but with microtransactions to increase. With no major new release, this would have been a fair expectation.

Expect there has been a major release. Call of Duty: Warzone, is their new free-to-play battle royale which launched in March. This has been downloaded over 50 million times already. If you haven’t heard of the free-to-play strategy before it’s a popular approach which has seen a resurgence with “battle royale” game modes.

I expect this will cause ATVI to beat expectations for this quarter and even post a very positive outlook. I would say the cloud we potentially will see is a slow down for future projects due to the lockdown, and while COVID-19 is providing a boost now, we don’t know how long that uptick will last.


From ATVI Q4 Report

While we are seeing the lockdown ease across the globe, it’s worth knowing where ATVI is making its money, it still has a strong American base followed by the European nations. While most of their services look to maximise reoccurring revenues, I am expecting to see a drop off when it comes to monthly active users. Across all their business lines people have free time right now, with summer starting and no new games lined up for the next quarter I expect the next three months will be unpredictable and largely driven by when lockdown ends. I expect a dip in activity immediately following the lockdown ending or easing.


From Genuine Impact

What we do have is a very positive and strong outlook from the sell-side analysts. There is a very strong buy consensus. The target prices are roughly where we are right now until the quarterly earnings come out. I wouldn’t be surprised to see another 5-7% increase in target price for the next quarter, even with a large number of pandemic unknowns.

Summary

We aren’t at all-time highs but I expect this year we can hit them. With some punchy future games lined up over the next two/three years, we can expect some massive payoffs. With strong profitability through their own digital distribution channel, extremely loyal customer base, and excellent capital allocation this is a very strong quality play.

However, this isn’t a cheap stock to buy right now. There is a lot of expectation built into the price. Right now we are already at the target price for the quarter, which doesn’t leave a lot of room for any negative news whatsoever. Making it very likely even a great result won’t be good enough and we will see a price correction following the announcement.

If you take an annual view, this is a very strong momentum buy. Right now one of my favourites. Excellent forecasted revenue growth, a CEO who is closely aligned to the EPS increasing, and extremely strong future sentiment. It has room to grow both in terms of revenue and in terms of price per share.

Let me know what you think of this analysis, I’ve changed the style a little to see if it’s more informative. We’ll see what the stock looks like on Wednesday after earnings and some trading activity!

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I need to do some more reading on Imperial Brand. I’ll see if I can write something today @Jonny and @Pdw.

I was thinking about doing some extra education to help round out my analysis. I’m trying to balance giving a nice overview of what it is and the pros/cons, versus a deep drive into the market trends and those risks.

If nothing else this is keeping me entertained!

Thanks everyone for your support so far!

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Much appreciated. Thank you for your contribution to the community already!

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Hi Jack, massive thanks for your posts so far.

When you get some time, would it be possible to take a look at Qualcomm as well?

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Imperial Brands - IMB (Buy)

Thank you @Jonny and @Pdw for the suggestion. This isn’t a company I have ever considered looking at, and I ended up being impressed in a very investment focused type of way. After digging into the facts, Imperial make it their business to keep shareholders extremely happy.

With the half-year results out on the 19th of May, in two weeks, it seems a fitting time to make some assumptions and take a deeper look at the world of Big Tobacco.

imperial-brands-logo@2x

Who Are They?

A British multinational tobacco powerhouse. If it’s related to tobacco, these guys have a say. From farming, logistics, innovation, and even lobbying governments around the world. Imperial is there.

You might not recognise the name Imperial Brands or even their old name Imperial Tobacco. It’s far more likely you will know their retail brands.

Even with all these brands, and selling all over the world, plus acquiring new brands into the group. They are not the largest of the Big Tobacco kingpins.


From Statista - Leading tobacco companies worldwide in 2019, based on net sales

Who Are They Up Against?

We’ll do a high-level Quality, Value and Momentum comparison against their competitors whom you might also be interested in. It’ll also give us a frame of reference before we dive into the details. These shields are from Genuine Impact, and it compares each company against 5,559 others.

Imperial Brands


Decent quality, medium value and momentum.

British American Tobacco


Medium quality, very cheap value and promising momentum.

Philip Morris


Extremely strong quality, cheap value and very poor momentum.

Altria


Extremely strong quality again, medium value and momentum

Is There A Future In Smoking?

Before we hit the numbers, it’s worth considering the wider market and its future. Generally speaking, killing your customers is not considered a textbook approach to good business.


From Our World In Data - Death rate from smoking

Smoking-related deaths are declining. You’ll see that one of Imperial’s objectives is how to make smoking and tobacco use healthier. Keep your products addictive while less harmful is their ultimate goal. We’ll touch on Imperial’s activities in tobacco alternatives and even their “kick the habit” new products to target customers on the complete smoking life cycle.

Smoking has over the years lost some of the charm and appeal. While it’s usage is trending lower with younger generations it still remains strong worldwide, particularly in Asia.


From Our World In Data - Prevalence of tobacco use among adults

One-in-five (20%) adults in the world smoke tobacco. With 51% of British people having a very unfavourable view of tobacco companies, and 52% of Brits have never smoked, what is the attraction of investing in a tobacco company?

Show Me The Money

I said Imperial do a great job of looking after shareholders and investors. In fact, Genuine Impact ranks them #186 when it comes to capital allocation.

8th July 2019, Imperial announced the dividend would increase by 10%, and then went on to affirm, it would keep increasing each year going forward as well.

That alone might not sound impressive. Until you take into account the 5-year average dividend yield has come to 6.27%. With a payout ratio of 183%~, like many sin stocks, Imperial know why people invest and what they expect.

Payouts might pad your pocket today, but how will they survive for tomorrow?


From Imperial Brands - 2019 Full Year Results

I was surprised to see the growth is primarily in the Americas rather than in Asia. Thankfully we have some more up to date numbers to look at from the 2020 AGM.


From Imperial Brands - 2020 5th Feb AGM

NGP refers to non-traditional smoking, this is your vaping and tobacco addiction help medication. This line has been hit recently the future estimate is significantly lower year-on-year NGP net revenue. Imperial has brought in a further cost savings programme to mitigate some of these short-term headwinds hitting their operating profit.

Also in the US, they have banned flavoured vapours, which has been a cause for downplaying their future operating profits again. While a growing area still, it has been hit with a number of setbacks.


From Imperial Brands - 2020 5th Feb AGM

Not only have we seen high growth in their new product development, but the core product is also seeing steady growth as well. The real take away was the 95% cash conversion figure.


From Imperial Brands - 2020 5th Feb AGM

The slow increases in price, the high margins, and expansion into new growth regions mean revenue and profits are continuing to grow even when the volume is dropping.

The financial strength is extremely poor, which is normally an indication of too much debt.

On the 27th of April, one week ago, Imperial agreed on the sale of its cigar business. This is a £1.1m~ injection (in two parts) into the business to help it pay off debts, and to keep the business more streamlined and focused.

So much debt is there? £13 billion. Suddenly the revenue figures don’t look as attractive.

Now the good news is most of this debt isn’t maturing for a long time, and often is in the form of the going credit facility, to which they just signed a £3.5bn deal for. With a line of good credit and high cash conversion, it seems they have the reliance they need to keep expanding.

Buying A Bargain

While Imperial has excellent control over its cash flow and access to easy credit, they don’t maintain the best balance sheet when it comes to buying this stock.

With a price to book ratio of 319, this might not be the best time to pick up some shares if you were hoping for a value-based decision.

The price to sales is extremely attractive at 0.97, which might help sway you.

The price ratios are very much all over, without a clear indicator whether this is a cheap buy or an overpriced mess.

Imperial themselves have said they haven’t been impacted by COVID-19, which means we can expect on-target results.


From Yahoo Finance - Six-month price history

There has been a COVID-19 dip but we are broadly back where we started, this does mean a degree of risk is still priced in compared to a non-pandemic situation.

Moving Forward

While their revenue is not growing how they hoped, analysts are not displeased with the results. With strong targets for future earnings and generally strong future sentiment.


From Genuine Impact - Beat/Miss and Analyst Ratings

While they have missed the target when it comes to earnings per share, they have been consistent with their revenue and earnings targets.

In fact, we can see some strong target price estimates from the sell-side analysts.


From Market Beat - Target Price Estimates

The share price is slowly dipping over the last five years as Imperial pays out to shareholders to keep them interested, and struggles to make headway with new products. However, the scrappy nature of management to get the job done and cut costs seems to be giving life to the targets.

Why A Buy?

I am seeing strong dividends and an under priced company. While I don’t like investing in a tobacco company I can see some upside in the short to medium term.

The business has shareholders at heart, will sell off under performing business arms and even reduce it’s product lines. They are taking steps to smooth their debt and they have a robust new credit line in place.

With a rough 20% increase based on the target price, this could be a short-term move while you scope out the next big buy.

Let me know what you think of the analysis and anywhere you would want more information or insight. I’m trying to get a balance right without it taking my whole day! Thanks for reading!

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That would be an exciting one! I’ll do some research today and see if I have enough to write about.

For me this is a great way to analyse new companies for myself too! :money_mouth_face:

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Qualcomm - QCOM (Hold)

Thanks to @Fotis for the suggestion to take a look at the mega chip manufacturer Qualcomm. This isn’t a company I have looked at before but it’s an exciting firm and one you might not have heard of, but you have likely engaged with their products and solutions.

qualcomm

Qualcomm is a specialist in network technologies, think 4G and 5G, for mobile and smart devices. They also get involved in the hardware as well as the policy side of wireless networks.

What Do They Do?

Qualcomm is split into three different divisions.


Source: Qualcomm Investor Relations

QCT develops and supplies circuits and software based on CDMA, OFDMA for mobile devices. We are talking smartphones to gaming devices, broadband gateway equipment to the Internet of Things (IoT) devices. Aside from their biggest market which is smartphones, smart and driverless cars will be a massive growth market for this segment.

This is the biggest revenue driver right now and the biggest focus of the business. Selling chips for the next generation of phones, e.g. 5G enabled phones with fast chips with integrated networks. They also offer network cards and software for Wi-Fi, Bluetooth, NFC, and even help support location and data services.


Source: QCT Information

QTL grants licenses to use portions of Qualcomm’s intellectual property, which includes patent rights essential to the manufacture and sale of some wireless products. Their heavy investment into the standards and processes in the wireless space, along with a rough and tumble league of lawyers, mean they can lockout competitors or collect IP license fees from rivals.

While a declining area, due to the growth of 4G over the years, we can expect this to increase as 5G devices increase in popularity. However, new competitors with their IP mean this isn’t going to be lucrative forever. This does force other companies to invest in their R&D creating an arms race.

It’s worth noting that Qualcomm has an advantage due to its vertically integrated business model. Versus other network firms who do not own the IP behind the technology, or even the manufacturing process.


Source: QTL Information

QSI looks after and makes strategic investments. This is different from the groups R&D which belongs to each sub-division. Here Qualcomm invests in different companies involved in automotive, IoT, mobile, datacentres, and healthcare.

This allows them access to the inside track with early-stage companies which might be moving faster in specialist areas. This is an easy way to acquire new licences or customers, depending on the focus of the company.


Source: QSI Information

What Are The Risks?

Qualcomm is a competitor to Huawei. The two has slightly different approaches but are heavily influenced by each other.

Huawei has secured 5G contracts in the UK, while this helps the rollout of 5G which enables 5G enabled devices (where Qualcomm can sell the chips) they are missing out on the available infrastructure plays.

There is also the bet on 5G delivering on the promise. Having faster internet on devices is only a small part of the deal. The real cherry is the new devices and technologies that 5G enables. For example, why do complex processing on your phone when doing digital enhancements to a photo (privacy concerns to the side for a moment) when it can be done by cloud edge computing? Fast, lean, cloud-based functions which your device can rely on to do complex processing without it being a drain on your device. Driverless cars where the central processing is done remotely due to the availability and speed of 5G. You are no longer limited to the hardware of the device you deploy with.


Source: Forecast of the 5G chipset market size worldwide from 2019 to 2027


Source: Number of wireless subscriptions by generation worldwide from 2010 to 2023

While the 5G growth and adoption, figures look extremely promising. Qualcomm does have an additional risk which isn’t shared by all its competitors.

The vertical integration of its business is a blessing and a curse. Any manufacturing or logistical issues encountered will be felt throughout the whole value change. This does make them slower to innovate against their adversaries who don’t have the same constraints.

We also have the different legal issues Qualcomm has, having just ended with a successful payout from Apple over the use of their IP. While they are the largest smartphone chip producers they are not loved by their customers. Making them vulnerable in the long run to a more customer-centric business. This is where their licence division focused not on making money but locking out competitors and keeping the barrier to entry as high as possible.


Source: Wallmine

Qualcomm is also extremely sensitive to a US/China trade war. Which is sadly brewing once again. If Trump is to be elected for another four years, this will put the pressure back on for Qualcomm as it damages it’s manufacturing plans.

Fundamental Headline


Source: Genuine Impact

Qualcomm is a very high-quality company. They have excellent profitability, bringing in $24.7bn in revenue and converting an impressive 18% into profit.

They also have a strong grasp over their debt due to the high cash conversion.


Source: Qualcomm 2Q 2020 Results

$2.5bn of short term debt is normally a warning sign, but with $8.4bn cash on hand (plus other cash-like assets which I haven’t included), this is meanly cash flow control.


Source: Qualcomm 2Q 2020 Financial Results (Summary)

In terms of a dividend, this might be an attractive business for you. With 72.5% of earnings paid back to investors! They sure know how to keep you sweet. A 3.2% dividend yield is impressive, while not groundbreaking, but can be sensitive to the risks mentioned before.

When it comes to buying Qualcomm it’s very expensive to pick up right now. Nothing about the price versus balance sheet, or income, or even against the cash flow is attractive right now.

Even when we take target share price figures into account and future growth, the company is still overpriced. There is a lot of optimism around the 5G explosion with little risk priced in. This means negative news or slowdowns (which the trade war can easily bring back) we can expect to slash the price.


Source: Genuine Impact

We are also seeing an unimpressive, but not concerning view from the sell-side analysts. We are seeing analysts change from a buy rating to a hold one.

I can understand why, with so many unknowns in the immediate future, and trade war 2 electric boogaloo on the horizon, we can expect some discounting of the share price yet.

So Why A Hold?

There is a lot of upsides here, I see strong future growth and a high-quality company with enough cash reserves to fight off the competitors and keep winning big deals.

When it comes to 5G these are the guys to watch, while slower than their peers they have the vertical integration few companies can dream of.

However, we are likely going to face some short term volatility. This is a stock to watch, if you hold it you won’t have any issues with pound cost averaging, but if you are looking to enter this is one to add to the wishlist and keep monitoring. We have political, manufacturing, and competition risks to manage right now unless you are happy to lockin and get those dividends, this doesn’t feel like one to rush.

Either wait for the next earnings or until the share price makes this slightly more attractive.

Let me know what you think! Any suggestions for companies or funds to look at next, or any points you disagree with. Love to hear your feedback!

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Great post man! Thanks a lot :slight_smile:

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