I last covered Broadcom (AVGO - Analyst Report) as the Bull of the Day in early March when shares were trading just above $140 and the merger between Avago and Broadcom kept the former's stock symbol and the latter's name for the new combination.
And as AVGO has always done, it's back to a Zacks #1 Rank after fruitful merger synergies and strong guidance in Wired and Wireless divisions.
Not Your Average Chip Maker
Based in Singapore, Broadcom Limited is $67 billion premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems.
Broadcom products primarily serve four target markets: Wireless Communications, Wired Infrastructure, Enterprise Storage, and Industrial services and infrastructure, including the build-out of hyper-fast communications and information technology, commonly called the 100 Gibabit Ethernet.
In computer networking, Gigabit Ethernet (GbE or 1 GigE or simply GE sometimes) is a term describing various technologies for transmitting Ethernet frames at a rate of a gigabit per second, or 1,000,000,000 bits per second.
Another Strong Quarter
Broadcom reported Q3 fiscal year 2016 results on September 1, beating the Zacks EPS consensus by 8%. Net revenue was $3.79 billion, an increase of 7% from $3.54 billion in the previous quarter and an increase of 119% from $1.735 billion in the same quarter last year.
Gross margin was $1.78 billion, or 47% of net revenue. This compares with gross margin of $1.046 billion, or 29.5% of net revenue, in the prior quarter, and gross margin of $884 million, or 51% of net revenue, in the same quarter last year.
Given the more powerful lineup of Enterprise Wired and Mobile Wireless products, plus the cost synergies, analysts raised the Zacks EPS consensus for the first full fiscal year of the combined companies (ending October 2017) from $10.96 to $11.40 in the past 60 days.
That 17.7% EPS growth next fiscal year, reflects a sub-15X P/E multiple for a key Apple (AAPL - Analyst Report) supplier in mobile and strong broadband network builder for top global enterprises.
And that expected earnings growth is built on sales that are projected to climb from $13.25 billion to $16.25 billion (the current Zacks consensus for 2017), representing nearly 22.8% growth.
Strength in Numbers
I have owned and traded AVGO for over two years now and was happy to buy more during the corrections in January and June. My belief was that large-cap Technology stocks would hold up the best in any declines, and outperform afterwards, because of solid earnings growth.
One of the things that has stood out all year was that while many Tech companies were taking a beating, especially those in the Apple supply chain, AVGO shares held up very well. Year-to-date, AVGO is up over 16.55% while the S&P 500 is up only 4.35%, as of October 12.
Broadcom's focus on multiple target markets and geographies mitigates operating risks and lessens the exposure to volatility in any single market. The Wireless Communications segment (33% of first-quarter fiscal 2016 revenues before the Broadcom acquisition) serves the smartphone, handset and base station infrastructure markets with leading-edge products that include Film Bulk Acoustic Resonator (FBAR) filters, power amplifiers and front end modules.
It supports the wireless industry with a broad variety of RF (radio frequency) semiconductor devices. Additionally the segment also provides a variety of optoelectronic sensors for mobile handset applications.
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. These are essential components of the mobile revolution and the BAW filter market has tremendous growth potential in China owing to the country's 4G build-out and Wi-Fi band proliferation.
Analysts On Board
Since the company's Q2 report, where Wall Street learned how well the BRCM acquisition was going, price targets have been moving higher with sales and profit estimates. The average price target over the summer was notching up toward $200.
Here's a look at notable price target (PT) moves since the Q3 report...
10/4/2016 Sanford C. Bernstein initiated coverage with an Outperform rating and a $215 PT
9/30/2016 JPMorgan Chase reiterated their Overweight rating and $220 PT
9/27/2016 RBC Capital Markets reiterated their Outperform rating and $190 PT
9/23/2016 Canaccord Genuity reiterated their Buy rating and $215 PT
9/20/2016 Susquehanna initiated coverage with a Positive rating and $200 PT
9/14/2016 Mizuho reiterated their Outperform rating and $200 PT
9/9/2016 B. Riley reiterated their Buy rating and $215 PT
9/6/2016 Bank of America reiterated their Buy rating and raised their PT to $215
9/5/2016 Cowen and Company reiterated their Outperform rating and boosted PT to $205
9/5/2016 Barclays reiterated their Overweight rating and boosted PT from $185 to $205
9/2/2016 Morgan Stanley reiterated their Overweight rating and $200 PT
9/2/2016 Robert W. Baird reiterated their Outperform rating and $205 PT
9/2/2016 Jefferies Group reiterated their Buy rating and boosted PT from $190 to $209
9/2/2016 Deutsche Bank AG reiterated their Buy rating and bumped their PT to $205
Many analysts repeatedly talk about what they see as a "big disconnect" between Broadcom's strong EPS growth and low valuation. That story is still true given the metrics we've discussed here.
Cooker's bottom line: The new AVGO, Broadcom LTD, is one of best Technology names to own in any market environment. Always buy the dips.
Disclosure: I own shares of AVGO for the Zacks Tactical Trader.
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