2 Companies Calling Growth Investors

By Chad Henage - October 20, 2012 | Tickers: T, BRCM, CHA, QCOM | 0 Comments

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It should come as no surprise that telecommunications companies could be good investments. When you consider the popularity of both smartphones and tablets, and the increased use of mobile data, it seems obvious that investors would want a piece of this growing pie. With this in mind, I went to the Fool.com CAPS Screener to come up with some new investing ideas. However, I wanted companies that not only played in the telecom arena, but also companies with some consistency in their results. I ran a screen for companies that had both 10% revenue growth, and 20% EPS growth over the last three years. To make sure they would be well established and have the capital to expand, I also limited my search to large caps. This was a tough screen and only two companies made the cut: China Telecom Corp. (NYSE: CHA) and Qualcomm (NASDAQ: QCOM).

China Telecom Corp.:

China Telecom could be thought of as the AT&T (NYSE: T) of China. The company provides 170 million people with wireline access and 126 million people use their wireless service. In addition, the company also provides broadband access to 77 million people at last count. With AT&T providing wireless access to about 104 million people here in the U.S. you can see how I could compare the two. There are three big differences between China Telecom and AT&T. First, AT&T's yield is significantly higher at 4.88% versus just 1.6% at China Telecom. Though AT&T has China Telecom beat on yield, the clear lead in future earnings growth goes with the international carrier. In the next few years, analysts are calling for nearly 16% growth at China Telecom versus about 10% growth at AT&T. Third, China Telecom has the advantage of a much larger population to sell its products and services to, considering that the U.S. has about 1/3 of the population of China. China Telecom also has a strong balance sheet showing just a 0.12 debt-to-equity ratio. When you look at AT&T's debt-to-equity ratio of 0.58, China Telecom looks even more impressive. For investors looking for a faster growing version of the stateside AT&T, look across the globe to China Telecom.

Qualcomm:

Qualcomm was the only other large cap. to meet my requirements, and it looks like this company isn't going to be slowing down anytime soon. As most people know, Qualcomm holds some of the key patents that allow mobile telephony to work. This makes the company a cash cow, and they also heavily participate in producing chips for mobile phones as well. The company's Snapdragon chips have found a place in many smartphones and tablets. What is impressive is the significant value that Qualcomm offers to investors. In fact, though much has been made about the popularity of Broadcom Corp. (NASDAQ: BRCM) chips, particularly in the iPhone, even Broadcom has a hard time matching up to the value of Qualcomm. Take a look at some of the differences:

I know what you may be thinking, what kind of value is there if the stock is relatively more expensive? This just goes to show that you can't judge a book by its cover. The huge difference between Qualcomm and Broadcom is in their balance sheets. Broadcom shows relatively little debt with a debt-to-equity ratio of just 0.18, however Qualcomm has a net cash and investment position of over $26 billion. This $26 billion represents more than 25% of Qualcomm's market cap. When you subtract this cash and investments piece, investors are actually paying about $45.32 a share for Qualcomm's actual business. At a price of $45.32, the stock really sells for a forward P/E of about 12.4 compared to the 16.71 that investors see on paper. This brings Qualcomm right in line with Broadcom when it comes to PEG ratio, yet Qualcomm is expected to grow slightly faster. This is a hidden opportunity for informed investors to take advantage of the market seemingly mis-pricing Qualcomm's actual business value.

In addition, Qualcomm generates relatively more free cash flow than Broadcom. In the last year, Qualcomm generated about $0.29 of free cash flow for each $1 of sales. By comparison, Broadcom generated $0.23 of free cash flow per $1 of sales. As you can see, Qualcomm seems to represent a better value because of its faster growth rate, better balance sheet, and better free cash flow generating capabilities.

Conclusion:

If you are looking for a company in the telecom space, investors could hardly go wrong starting with either Qualcomm or China Telecom. Both companies show good growth in the past and appear set to continue to deliver significant growth in the future. Investors should check out each company to see if one or both could help them dial up better returns going forward.

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