Why Analysts Love the Qualcomm Settlement

Cowen maintained an Outperform rating with a $75 price target after news that the semiconductor giant had received a settlement deal from China in the antitrust case. The firm said that the debate likely will shift to the potential spillover effects outside of China.

Credit Suisse’s Kulbinder Garcha was on the case for Qualcomm, as he maintained an Outperform rating with a price target of $80. According to Credit Suisse, the settlement removes a key overhang of the stock and as a result the firm is raising its earnings per share (EPS) estimates by 1% to 4%. The new guidance given by Qualcomm appears to be conservative as well.

There is a positive outcome expected as the Credit Suisse maintains its long-term growth of 6% in unit terms and 5% in revenue terms. Qualcomm is assumed to achieve a 2.5% royalty from the Chinese vendors and that their sales share rises to 40% from 30% now.

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The firm also points out the three key elements in the rectification plan, or settlement terms:

• For licensees, QCOM will offer a new structure with multimode 3G/4G devices (GSM, WCDMA, TDSCDMA, TD-LTE and FD-LTE) charged royalties of 5% on 65% of the net selling price (effective rate of 3.25%) and 3 Mode devices (TD LTE, TDSCDMA and GSM) royalties of 3.5% of 65% of net selling price (effective rate of 2.28%). Note this applies to sales within China, and Credit Suisse believes the rates outside China could be more meaningful and are not likely to change.
• Qualcomm will offer licenses to its current 3G and 4G Chinese patents separately from other patents and cross license in good faith.
• Qualcomm licensing will not condition the sale of basebands on the license being taken.

Canaccord Genuity maintained a Buy rating, stating that the resolution with China likely contains a licensing issue.

Sterne Agee maintained a Buy rating with a price target of $75. The firm considers the overhang on the stock removed, noting a modest upside for earnings in 2015 and a better potential in 2016. Sterne Agee made a similar call to Credit Suisse:

QCOM after the close noted a settlement with the NDRC with a $975M settlement charge for F2Q15 (Mar). QCOM noted a new 5% licensing on 3G/4G multimode devices and 3.5% on 4G/LTE-TDD only but using 65% of ASP. QCOM noted the new royalty rates: 1) apply to China only, 2) for devices sold by Chinese OEMs outside China the rates do not apply, 3) it will offer these rates to its other “preferred OEMs” in China, and 4) it expects that the settlement should enable it to focus on further compliance and core design wins into F16E as it puts the distraction behind. QCOM raised its F15E revenues/EPS modestly. We are not changing our estimates here, but the settlement removes an overhang and could bring more OEMs into its licensing fold.

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FBR Capital Markets maintained an Outperform rating and raised its price target to $80 from $77. The firm noted that fines and royalties were not as harsh as expected. Despite being found in violation to China’s antitrust law, the terms of the new royalty deal were less than perfect and the firm views the deal better than feared and a net positive for Qualcomm.

The firm explained in its report:

Despite the problems with the NDRC (National Development and Reform Commission), QCOM still is the cornerstone in cellular technology. While competitors may be taking some market share away, the market opportunity that exists makes up for that. The stock has a P/E below the semiconductor market average, presenting a high-quality value opportunity. We maintain our Outperform rating and are raising our price target from $77 to $80 based on a P/E multiple of roughly 17x our 2015E pro forma EPS (including SBC, excluding net cash and related interest income.

Shares of Qualcomm were up about 4% at $69.89 in Tuesday morning trading. The stock has a consensus analyst price target of $74.09 and a 52-week trading range of $62.26 to $81.97.

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