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Broadcom Slips to Buy

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On Feb 5, Zacks Investment Research nominally downgraded semiconductor manufacturer Broadcom Corp. to a Zacks Rank #2 (Buy) from a Zacks Rank #1 (Strong Buy) primarily due to marginal downward estimate revisions and flat share price movement post fourth quarter earnings release.

Broadcom’s share prices have more or less remained steady with minor price variations since the beginning of the year. Despite the flat trajectory, Broadcom still has the potential to drive the stock up. The stock is currently trading at a forward P/E of 17.3x and has a long-term earnings growth expectation of 12.1%.

Why the Downgrade?

Over the last 7 days, a solitary earnings estimate for Broadcom has been revised downward for 2014. This seems to be an aftereffect of a slightly bearish outlook for the ongoing quarter, wherein product gross margin on a GAAP basis is expected to be down 100 basis points to 150 basis points sequentially.

Share prices have also remained flattish following the fourth quarter earnings release as both revenues and earnings decreased year over year. Non-GAAP net income was $366 million or 60 cents per share in the reported quarter compared with $462 million or 76 cents per share in the year-earlier quarter. The downtrend was primarily attributable to lower revenues and high operating expenses. Revenues for fourth quarter 2013 were $2,064 million, down 0.8% year over year.

However, both revenues and earnings comprehensively beat the respective Zacks Consensus Estimate. Broadcom expects the broadband momentum to hold steady in the coming quarters, driven by emerging market penetration and new technology adoption in developed markets. The company intends to deliver healthy LTE (Long Term Evolution) revenues in 2014, while focusing on data center innovation and next generation home video products with HEVC (High Efficiency Video Coding).

Moving forward, we maintain our long-term Outperform recommendation on the stock largely due to its inherent growth prospects. Broadcom is well placed in the fast-growing wired and wireless communications markets with cutting-edge solutions for a growing number of connected users, who demand more content and bandwidth. Broadcom’s product leadership, solid financial performance and strong cash flow generation are its fundamental strengths.

Other Stocks to Consider

Other notable companies in the sector that are worth mentioning include Montage Technology Group Limited , NXP Semiconductors NV (NXPI - Free Report) and ON Semiconductor Corp. , each carrying a Zacks Rank #2 (Buy).

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