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Bull of the Day: Broadcom (AVGO)

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For quarter after quarter, I have been writing about Broadcom Limited (AVGO - Free Report) as the Bull of the Day and explaining why I've been strongly recommending and trading the stock since 2014 from $70.

Sometimes, I make this choice twice a quarter.

The last time was late January when AVGO shares broke above $200 for the first time. Here's how I described this powerhouse technology company in that report...

3 Key Segments

Though Broadcom is generally classified as a semiconductor designer and developer, its solutions serve telecom and enterprise networking customers in the build-out of data centers and high-speed, broadband communications. I can't say for sure if AT&T (T - Research Report)    , Cisco (CSCO - Research Report)    , or Alphabet (GOOGL - Research Report)    are customers, but I would be surprised if they weren't.

Thus about half of Broadcom's sales come from the Wired Infrastructure segment which has been seeing steady double-digit growth as these big customers transition to the 100 Gigabit Ethernet protocol.

Approximately 30% of Broadcom's revenues come from its Wireless Communications division which serves top-end mobile smart-device makers like Apple (AAPL - Research Report)    with radio frequency (RF) chips, amplifiers, and FBAR technology filters. Broadcom FBAR (Film Bulk Acoustic Resonator) filters are a form of bulk acoustic wave (BAW) filter that have superior performance with steeper rejection curves compared to surface acoustic wave (SAW) filters.

The third major segment at Broadcom is Enterprise Storage, which connects back with many customers from the Wired division and supplies just under 20% of revenues. The company's products enable the high-speed movement of digital data with a secure connection among multiple PCs, servers and storage devices such as hard disk drives and solid state drives.

While AVGO's Wireless business is "dependent" on Apple, that's not exactly a bad problem to have. The coming next wave of 5G technology will keep both companies rolling in sales growth.

And Broadcom's largest business, the Wired segment, is very busy meeting the demand of companies building high-speed, broadband networks, especially with the data-hogging loads of video and the storage requirements of the Internet of Things.

I Have $250... Do I Hear $300?

So what has changed in a month to make Broadcom the Bull of the Day again? Well, here's what I wrote in late January to explain why I chose AVGO again after just profiling the name back in early December...

Simply this: the stock took off over 10% to new highs in the past six sessions as a couple of analysts bolstered their view of this must-own tech "arms dealer." While I've been following fund managers into AVGO for nearly 3 years, the growth story is not over.

On January 18, RBC Capital analyst Amit Daryanani reiterated his Top Pick rating on AVGO shares and raised his view of the company's long term earnings potential to $17 EPS on the heels of the acquisition of Brocade (BRCD). Here's what he had to say...

"Our analysis suggests the underlying EPS power of AVGO increases materially post BRCD (especially assuming they raise $1.5-2.0B from networking & real estate sales). We think AVGO could achieve >$17.00 of EPS by FY19 (prior $16) and the stock should work in an upside scenario to $250+."

Oddly, the analyst did not raise his existing price target from $200.

So we'll leave that to a bolder fan of the company...

On January 24, Morgan Stanley analyst Craig Hettenback raised his price target on Broadcom to $240 from $210, and obviously reiterated his Overweight rating. Here's the MS view...

"Increasing our PT to $240 from $210 and highlighting a bull case valuation of $300. Our PT is based on a 15X P/E on CY18 EPS, representing a turn increase from the current multiple but still a conservative 20% discount to the high end Semiconductor peers and 15% below the market. AVGO's multiple has been flat (100% of stock appreciation has been driven by growth in EPS) compared to a roughly 2x turn increase in semiconductor stocks, with investors unwilling to pay up for acquired growth.

"However, we now have increased conviction that clearer focus on its outperforming core business, materially higher cash returns and ongoing margin expansion will drive a re-rating over the next 6-12 months.

"The combination of Avago and Broadcom is unmatched in Networking (40% sales) in our view, which has positive implications for both growth (share gains) and profitability. We also think the company remains well positioned in RF to exploit the next growth driver of carrier aggregation, leveraging its leadership in premium filters and multiplexers."

Another Beat and Raise Quarter

On March 1, Broadcom once again delivered the growth outlook that smart investors have been buying for nearly 3 years.

On March 2, this brought a cacophony of raised EPS estimates -- driving the stock to a Zacks #1 Rank again -- and raised price targets from Wall Street investment banks, few of who wanted the lonely glory of being a nay-sayer. This latter action drove shares to quickly eclipse the $215 and $220 levels for the first time ever.

The i-bank analysts included the likes of RBC and Morgan Stanley, who raised their targets to $240 and $245 respectively.

Instead of hearing their updated views, let's hear from two banks who lead the charge on AVGO price targets.

Baird raised its price target on Broadcom Limited to $260 from $205 and maintained their Outperform rating.

Analyst Tristan Gerra remains bullish on the semiconductor outlook for 2017 and named Broadcom as a top pick. "Reiterating Outperform rating on valuation, a bullish semiconductor outlook for the year, continued strength in wired infrastructure, incremental content in the iPhone8, along with a continued recovery in the Industrial segment. Expected 10% PF EPS."

Jefferies raised also its price target on Broadcom to $260 from $210 and reiterated their Buy rating following another quarter of strong results and outlook. They expect 100% FCF and 50% dividend growth in FY17.

Analyst Mark Lipacis remarked "AVGO beat & raised and reiterated its commitment to dividend growth. We model AVGO's FCF to nearly double in FY17 to $5.3 billion, and based on its capital return framework, we expect its dividend/shr to increase by as much as 50% over the next 12 months. We've shown that high FCF growth leads to outperformance and increased capital return translates to P/E expansion. We further estimate its BRCD acquisition could add up to $1.25 in EPS. Reiterate Buy rating."

The AVGO Campaign

And there you have an update on the continuing saga that I call "The AVGO Campaign." It tells you what works and makes you money in a bull market: finding earnings momentum winners that you know institutions will continue to buy until the cycle ends.

Consider AVGO your "playbook stock" for how to use the Zacks Rank to swing trade fundamentally-strong companies quarter after quarter.

You can find out more by following me in my TAZR Trader service.

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