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Will Broadcom (AVGO) Disappoint Estimates in Q2 Earnings?

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Leading semiconductor manufacturer Broadcom Limited (AVGO - Free Report) is scheduled to report second-quarter fiscal 2016 results after the closing bell on Jun 2. In the last reported quarter, Broadcom’s adjusted earnings comfortably exceeded the Zacks Consensus Estimate by 15 cents.

The company has beaten earnings estimates in each of the last four quarters with an average positive earnings surprise of 6.6%. Let’s see how things are shaping up for this announcement.

BROADCOM LTD Price and EPS Surprise

BROADCOM LTD Price and EPS Surprise | BROADCOM LTD Quote

Factors to Consider this Past Quarter

In the fiscal second quarter, Broadcom added Ethernet switching and routing, standard products, physical layer (PHY) copper, and optical standard products to its offerings. The company exhibited its PAM-4 PHY chips driving copper cables, which are designed for 100GbE, 200GbE and 40GbE data center interconnects, at the Optical Fiber Communication summit. Such innovative products are likely to augment the revenues of the company.

For the quarter, in addition to Avago classic RF FBAR (Film Bulk Acoustic Resonator) filters and power amplifiers, the company’s wireless segment is likely to include classic Broadcom's wireless connectivity and custom analog handset solution. The company expects its product lifecycle demand to decline in North America, which is likely to continue to impact its combined wireless revenue. Broadcom expects the wireless segment to contribute approximately 23% of the company’s total revenues from continuing operations.

However, Broadcom is affected by the seasonality in the semiconductor and related industries. Net revenue in the fiscal second half has typically been higher than the first half due to seasonality in the wireless communications target market. Continuous product introductions and integration of acquired companies also burden Broadcom with high operating expenses. All these factors will to an extent affect the growth potential of the company in the to-be-reported quarter.

Nevertheless, Broadcom continues to strive to achieve its $750 million target in annualized cost synergies over the next six fiscal quarters. We believe the company is well poised to even beat that. The company is also working on returning to its long-term financial model of driving operating margins back above 40% as quickly as possible.

Earnings Whispers

Our proven model does not conclusively show that Broadcom is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently at -3.50%.

Zacks Rank: Broadcom’s Zacks Rank #3 increases the predictive power of the ESP. However, an earnings ESP of -3.50% make a surprise prediction difficult.

On the other hand, Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Ctrip.com International Ltd. (CTRP - Free Report) has an Earnings ESP of +17.91% and a Zacks Rank #3.

The Cooper Companies Inc. (COO - Free Report) has an Earnings ESP of +1.04% and a Zacks Rank #2.

UniQure N.V. (QURE - Free Report) has an Earnings ESP of +2.44% and a Zacks Rank #3.

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