Qualcomm Inc (QCOM)

[khemara_qc]

Wired into wireless equipment
Schwab SoundView ups Qualcomm, cuts Nokia

By Susan Lerner, CBS.MarketWatch.com
Last Update: 11:50 AM ET March 29, 2004

NEW YORK (CBS.MW) - In four years covering the stock, Schwab SoundView's Matt Hoffman has never carried the firm's highest recommendation on Qualcomm.

That all changed Monday but the move came at the expense of its competitor, Nokia.

Telling clients he believes the Nokia threat in CDMA, or Code Division Multiple Access, will diminish rather than grow in 2004, Hoffman upgraded Qualcomm (QCOM: news, chart, profile) to "outperform" from "neutral" while downgrading Nokia (NOK: news, chart, profile) to "neutral" from "outperform."

Still, both shares rose in morning trade: Qualcomm lifted $2.17, or 3.5 percent, to $63.93 while Nokia added 49 cents, or 2.5 percent, to $20.05, as Merrill Lynch said a number of data points indicate wireless handset volumes were strong this quarter -- which could have positive implications for both Qualcomm and Nokia, as well as Motorola.

Motorola shares (MOT: news, chart, profile) were better by 46 cents, or 2.7 percent, to $17.44.

"We think that the strong demand, especially in emerging markets, bodes well for Nokia and we see the company gaining market share this quarter (vs. the Dec. quarter) on the back of this strength," Merrill analysts Peter Dionisio and Tal Liani wrote in a research note. The analysts believe concerns about the poor rate of introduction of new phones by Nokia this year are "excessive."

Those trends would also benefit Motorola and Qualcomm, they said.

"On Qualcomm, while the manufacturing constraints create a more receptive environment for competitors Nokia and Texas Instruments (TXN: news, chart, profile), we believe it leaves very little room for disappointment in the near-term and should the company secure more manufacturing capacity in the near-term these shortages should not impact Qualcomm's long-term outlook," Dionisio and Liani said.

Back at Schwab SoundView, Hoffman was not so enthusiastic about Nokia.

"Contacts suggest the recent reorganization has been a distraction and helped lead to NOK's weak trade show season handset announcements," Hoffman said.

Recent checks, he noted, suggest price cuts made by Nokia in early February on high volume GSM products have not yielded the higher market share and unit volumes past reductions have delivered.

Furthermore, the company may also lose share in the CDMA market, he said.

GSM is the third-generation mobile phone technology standard in Europe while CDMA is the leading technology in North America.

"Given our view that 2004 will be a good year for handsets, and not a spectacular year like 2003 was, we prefer to own companies that are gaining market share, most notably Motorola, over market plays like Nokia," Hoffman said.

Although he believes it's difficult to see how Nokia can avoid share losses in the near-term, Hoffman said he would be surprised to find this is a permanent condition given the company's "superior balance sheet and management team."

In addition to the downgrade, Hoffman cut his price target on Nokia to $21 from $28 but said he expects the company's reorganization could show positive results by the second half.

With the diminishing threat from Nokia, Hoffman is feeling more confident about Qualcomm.

At the same time, the analyst noted that CDMA chip demand remains strong and the CDMA handset market is strong while wideband, or W-CDMA, opportunities approach.

"W-CDMA greatly increases QCOM's addressable market, and no matter what level of market share it takes in W-CDMA chips, it is all incremental to the zero percent market share it has in GSM chipsets (where TXN dominates)," Hoffman said.

Hoffman boosted his fiscal second quarter earnings forecast to 48 cents a share from 40 cents and his third quarter outlook to 38 cents from 32 cents.

He also lifted his price target for the shares to $75 from $55.

Susan Lerner is a reporter for CBS.MarketWatch.com.

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