The big corporate merger news on Wall Street today is that Cabela’s (CAB) is being bought out by / merged with Bass Pro Shops at a price of $65.50 per share in cash for a valuation of $4.5. billion. Given that Cabela’s earns profits of $3 per share, you might wonder: What gives with the 21.8x earnings valuation? Given that most mergers of mature/maturing businesses take place in the range of 30-40x earnings, and given that there is usually a premium of 37% attached to the typical corporate takeover, you would be wise to ask why Cabela’s is only getting bought out for a 19% premium compared to recent trading.
If you look at a stock screener, you will see that Qualcomm (QCOM) stock currently trades at a P/E ratio of 20x earnings. For instance, if you type in “Qualcomm stock quote” into a Google search, you will see that Qualcomm closed on September 30th at $68.50 per share and has a P/E ratio of 20.08. I attach a screenshot below.
This assumes that Qualcomm’s twelve-month earnings are $3.41 per share, and this assumption is incorrect because it dramatically understates Qualcomm’s earnings power. In late 2015, Qualcomm launched a significant layoff constituting 15% of its workforce. I don’t like it when companies simultaneously brag about their corporate responsibility while getting rid of thousands of people in the pursuit of billions of additional profits, but I would not be able to cover the investment arena if an unqualified moral endorsement were an antecedent condition to investing. And plus, a fair analysis involves recognizing the net benefit to civilization caused by Qualcomm’s brilliant engineering of modems that are present in devices such as the Apple iPhone.