Qualcomm Looking Up; Six Flags at a Bargain

Qualcomm (QCOM)

Jim: Buy

Mike: Buy

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Mike: The stock of this San Diego-based telecommunications company rose so far so fast last year, Jim, that it seems BMWs and Jaguars were sprouting on the streets of San Diego like dandelions on a sump.

Jim: Qualcomm’s stock performance was even eclipsing Broadcom’s, which tells you something.

Mike: I only hope that all those Qualcomm investors who bought those cars paid cash--and took some profits in their shares awhile ago--because this year the word on Qualcomm has been “look out below.”

Jim: It’s been ugly ever since the first week of January.

Mike: Yep. The stock has lost nearly 70% of its value year-to-date, after soaring 26-fold in 1999.

Jim: Qualcomm split the stock 4 for 1 in December. And Jan. 3, the post-split stock hit a record $200 a share. Today, the price is in the high $50s. But before we go any further, let’s talk about what Qualcomm does.

Mike: Is that where I come in?

Jim: You have the floor.

Mike: All right. Qualcomm is the developer of a wireless phone technology known as CDMA, for code division multiple access. This is one of several ways to slice up phone transmissions digitally so that you can pack more into a single stream.

Jim: Meaning?

Mike: It increases the capacity, and to a certain extent, the clarity of your wireless phone. Carriers not only can handle more calls, but can also offer their users a lot more on their phones than a voice at the other end. Like Web pages, for instance.

However, there are competing technologies, including one used in Europe known as global system for mobile communications, or GSM.

Jim: But many analysts believe Qualcomm’s CDMA will be the standard for wireless phones going forward. And that’s important because Qualcomm not only has been making the CDMA-based chips that go into the phones . . .

Mike: Let me correct you a bit. Qualcomm is what is known as a “fabless” chip company, meaning it does not manufacture, or fabricate, its own chips. Qualcomm develops the chips, but it outsources their production.

That said, it’s the largest fabless chip company in the world. And as you say, there is an argument that CDMA is the technology best suited for new applications on mobile phones.

Jim: There’s one other key point about Qualcomm: It holds a ton of patents on CDMA technology. So even if its customers buy CDMA chips from another company, Qualcomm gets a piece of the action because it gets licensing fees for its patents.

Mike: Correct. Now, if CDMA technology expands as many expect it will--even into Europe, where it may be paired with GSM--Qualcomm will be a major beneficiary. It’s certainly the horse to ride in the CDMA race.

Jim: Which begs the question: Why has the stock gotten hammered? There are several reasons. First, the stock was so hyped and overpriced that any bad news was bound to send it into a tailspin.

Mike: And the bad news arrived right on time.

Jim: Sure did. It got hit with sales setbacks this year in two major Asian markets, South Korea and China.

Mike: Chinese telecom firm China Unicom, which is a government company, was going to use CDMA and buy its equipment from Qualcomm, but it put off that decision. To be fair, the market assumes that China will eventually come back.

Jim: To make things even more complicated, Qualcomm now is going through a major restructuring of its own. First of all, it used to make cell phones itself, but it agreed to sell that business to Kyocera of Japan.

Qualcomm also recently said it will shed its chip business, which as we noted is basically developing chips for others to produce.

Mike: Yeah, the company now is going to spin off its chip-selling operations while retaining its chip licensing, meaning the royalties it is paid for its patents. Qualcomm initially is going to spin off less than 10% of the chip business to the public; Qualcomm stockholders will eventually get the other 90% of this new company.

Jim: So, we’ve drawn the big picture . . .

Mike: And now let’s connect the dots?

Jim: Right. I like this stock. Do you?

Mike: Yes. Qualcomm’s positives outweigh its negatives, which I think are all mostly temporary.

Jim: And meanwhile, the negatives are already built into Qualcomm’s battered price. Now, the stock is still selling for nearly 60 times the company’s expected earnings per share this year, but . . .

Mike: That’s not exactly building in a lot of negatives.

Jim: I think it is. Any stock that goes from $200 to $55 or $60 has built in a lot of negatives. Actually, I wish the price were lower. But even so, I like Qualcomm’s prospects. I agree its problems are short term, I believe CDMA will be the leading technology for wireless phones, and I see Qualcomm’s restructuring moves as a bonus.

Simply put, this company, whose sales will top $3 billion this year, has a solid long-term future.

Mike: Agreed. The stock market today has a completely different mind-set from 1999, when people would bid up anything just based on potential. I think this stock has been beaten down to the point where it’s a smart move to load up.

Six Flags (PKS)

Jim: Buy

Mike: Buy

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Mike: Jim, our second stock today is a company that is well known to anybody with teenagers. But I believe that Six Flags has one overwhelming, insurmountable problem.

Jim: What might that be?

Mike: That you can’t put a roof over a 900-acre amusement park.

Jim: You can’t?

Mike: And the impact of that physical limitation was very clear to Six Flags and its investors this summer. We’re not very sensitive to this phenomenon in Southern California, where the only weather is earthquakes. But in the rest of the country, this was one of those summers when it seemed to rain every damn weekend.

Jim: And it did.

Mike: Almost: The figures show that 70% more weekends than the year before were rained out in Six Flags’ key markets, such as New York and the Midwest. And that has the same effect on Six Flags as a high-roller hitting his numbers has on the quarterly results of a casino company.

Jim: Now, Six Flags, which used to be known as Premier Parks and is based in Oklahoma City, has 36 amusement parks in the United States and overseas. The best-known one around here is Magic Mountain in Valencia.

This company makes most of its profit in the second and third quarters, which is the summer time, and this summer they got nailed by the weather. But I don’t think that’s the main problem with Six Flags.

Mike: More storm clouds ahead?

Jim: First, I can’t help a cheap pun whenever I see one.

Mike: Please, I don’t want to hear about roller coasters.

Jim: The chart of this stock’s price for the last 12 months looks like a roller coaster that is now careening down the slope.

Mike: But roller coasters have to go up before they can come back down.

Jim: You’re right. So are you strapped in?

Mike: I’m keeping my hands and feet inside the car.

Jim: I’d buy this stock but first I’ll mention my one caveat: The biggest problem with this company is that it’s way too leveraged, thanks to a takeover spree in recent years. I think its debt load is a real burden and gives Six Flags little room for error.

Mike: It faces a lot of capital spending: This is an industry in which you always need a new roller coaster that you can promote as being better or faster than any other coaster around.

Jim: And that isn’t cheap. That takes a lot of money and promotion and marketing and so forth. But my problem with it is that even in 1999 . . .

Mike: I thought you liked this stock?

Jim: I do.

Mike: So what’s your problem?

Jim: I’m just noting something that investors should think about. In 1999, when weather wasn’t a factor, this company still lost $54 million on about $930 million in revenue. A big reason was the $169 million in interest it had to pay on its debt. Two years earlier, the interest tab was only $18 million.

Six Flags wants Wall Street to look past the interest bill and focus on its long-term potential and its cash flow.

Mike: Yes, this is your basic cash-flow company, isn’t it? You get the admission price, and then you mulct the visitors for every dime they have left in their pockets. Food, trinkets, all that other chazerei.

Jim: Anyway, the weather scared off investors this summer, as well as visitors, from Six Flags. So the stock just got incredibly oversold.

Mike: You mean it got too low.

Jim: Right. So now we’ve got a stock that is about $15, which is very cheap, considering that among the independent amusement park operators Six Flags is by far the largest.

Mike: I agree Six Flags is a buy at this price. The only question is how long investors are going to wait to ante up, because no one is going to know how well this company will do next year until . . .

Jim: Next year. It’s been noted by some analysts that there are only two times a year that Six Flags can surprise you, and that’s when it reports its second- and third-quarter earnings. So you could be sitting on dead money for a while. But I would get in at this price and not try to time this stock.

Mike: I guess we’re agreed that the advice that we’re giving is for investors to add more dead money to the dead money they’ve had in every other stock in the market over the last six months.

Jim: Look, you’ve had dead money in the Standard & Poor’s 500 index all year--it’s up less than 2% since Jan. 1. So who’s to bad-mouth Six Flags if it’s dead money for a while?

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).