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Broadcom (AVGO) to Report Q1 Earnings: Is a Beat in Store?

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Broadcom Limited (AVGO - Free Report) is scheduled to report first-quarter fiscal 2018 results after the closing bell on Mar 15. Last quarter, the company delivered a positive earnings surprise of 2%. Broadcombeat earnings estimates in the trailing four quarters, with an average positive surprise of 4.54%.

Broadcom’s expanding product portfolio makes it well-positioned to address the needs of rapidly growing technologies like Internet of Things (IoT) and 5G. The company is also benefiting from strong demand for Wi-Fi chips and radio frequency solutions from smartphone original equipment manufacturers (OEMs).

The company’s shares have returned 17.2% year over year, substantially outperforming the 11.3% rally of the industry.

It has been dominating headlines thanks to its proposed merger with Qualcomm (QCOM - Free Report) . The status of that deal has finally come to a conclusion, with President Trump’s order to immediately prohibit the proposed takeover on grounds of national security concerns. But investors will certainly want to focus on Broadcom’s latest results to gauge its financial health as the deal gets terminated.

Let’s see how things are shaping up for this announcement.

Key Factors to Consider

Segmental Details & Strong Product Portfolio

Broadcom is benefiting from strong demand for its wireless solutions. Last quarter, Wireless Communications (37% of total revenues) were up 33.4% year over year and 40% quarter over quarter to roughly $1.80 billion. Strong growth was driven by the ramp up in shipments of next-generation platform from the company’s large North American smartphone customer. Higher dollar content in this platform also drove top-line growth.

The Zacks Consensus Estimate for the Wireless Communications segment revenues are currently pegged at $1.93 billion.

Coming to the, Enterprise Storage Segment (13% of total revenues) it increased 15% from the year-ago quarter but plunged 12.2% sequentially to $645 million. The sequential decline was due to lower hard-drive disks (HDDs). However, strong growth expectation in the server and storage connectivity business will completely mitigate the negative impact from HDDs.

The Zacks Consensus Estimate for the Enterprise Storage segment revenues are currently pegged at $937 million.

Moving forward, the company’s has launched its first-ever silicon-proven 7nm intellectual property (“IP”) targeting application-specific integrated circuit (“ASIC”) platform for deep learning and networking markets.

We believe that the company’s extensive product portfolio, which serves multiple applications within four primary end markets (Wired Infrastructure, Wireless Communications, Enterprise Storage, and Industrial & Other), will help it to positively impact to-be-quarter’s results.

Acquisitions Plays an Important Role

Acquisitions have played a significant role in deciding Broadcom’s growth trajectory. The long-delayed Brocade acquisition will boost its position in the storage area networking (“SAN”) space.

Broadcom was also targeting Qualcomm. Recently, the company made another acquisition offer for Qualcomm. The bid now stands at $117 million, or $79 per share, down from $82 per share previously.

However, the U.S. Treasury's Committee on Foreign Investment in the United States (“CFIUS”) has outlined key concerns in a letter dated Mar 5, 2018 to both Broadcom and Qualcomm Inc. related to their proposed merger deal.

The decision of the secretive government panel reflects an aggressive position by the administration to protect major American corporate names from being acquired by non-U.S. entities.

Broadcom has also stated its intention to redomicile in the United States that will help it pursue the Qualcomm acquisition again more aggressively. The move will also smoothen regulatory hurdles. Going forward, we believe that if the deal goes ahead Broadcom can reap the benefits of cost reduction. We note that it was able to derive cost cutting and financial engineering benefits from its merger with Avago Technologies.

Qualcomm’s investment in 5G wireless services as well as NXP purchase, which will offer significant exposure to self-driving cars and automotive market, will provide significant advantage to Broadcom.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The sell-rated stocks (Zacks Rank #4 or 5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Broadcom has a Zacks Rank #2 and an Earnings ESP of 0.00%.

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 beat on earnings:

Movado Group Inc. (MOV - Free Report) has an Earnings ESP of +1.96% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Micron Technology, Inc. (MU - Free Report) has an Earnings ESP of +1.26% and a Zacks Rank #2.

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