I won’t ‘av’ a go at Broadcom. $AVGO

aside: please comment at the r/investing post, thanks.

Broadcom's a regular request at stockAday, and since we've not written on it since December, let's do a recap!

Back then we suggested we should all be Rolling up with Broadcom $AVGO. Concluding:

So given the potential revenues and cost synergies, still to gain from the original merger and now Brocade…I have to admit to be tempted…especially since it's traded between 12 and 16x and today it's in the middle of the range.

1. So what's changed?

The fundamentals have ramped, as we move forward a year, the stock and target have jumped, and despite all that, the increase in the valuation has been modest. Nice.

$AVGO December today change
Price $163 $246 +50%
Target price $205 $283 +40%
Sales forecast $13.3bn $17.6bn +30%
EPS forecast $11.25 $15.91 +40%
PE ratio 14x 16x +15%

A quick aside

Though before we move on let's not forget the basic stats and links.

Ticker AVGO
Sector Semiconductors
Latest price $245.99
Value $100,359M
Daily vol $507M
Date 11 October 2017
Financials SEC Financials
Website broadcom.com

2. What's this star?

It's one of the largest semi-conductor companies out there, and it's really a roll-up of Avago, Broadcom and soon, Brocade.

It's got 4 divisions, though as you'll see the first three are the bulk of the value.

  • Wired Infrastructure (50% of sales);
  • Wireless Communications (28%);
  • Enterprise Storage (17%), and;
  • Industrial & Other (5%).

And if you are wondering what all that means, their chips end up in data center networking, set-top boxes, broadband & telecommunication equipment, smartphones, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Yeah, you're very likely to be using Broadcom kit.

A year ago, when they were talking about the Brocade deal they talked about adding $1.4bn of sales with the revenues of $AVGO growing 5% per annum with a little margin upside. The product mix is expected to change a little, with Brocade adding to the Enterprise Storage unit.

Shooting higher?

These figures are including the big M&A deals, so it's not organic growth, sadly…

Oct year-end 2012A 2013A 2014A 2015A 2016A 2017E 2018E
Revenue $2.3bn $2.5bn $4.3bn $6.8bn $13.2bn $17.6bn $19.2bn
EPS $2.25 $2.19 $0.99 $4.85 $-4.86 $15.91 $17.61
DPS $0.56 $0.80 $1.13 $1.55 $1.96 $4.06 N/A

In fact, it's hard to judge the historical figures at all, especially the year to Oct-2016, as there were considerable non-cash and restructuring charges that hit the bottom line. In fact, the adjusted earnings that year were: $11.30 a share, and everyone seems to ignore the reported EPS. One of those things that annoys me!

Deal junkies?

Although $AVGO looks like a deal junkie, with $8bn of net debt, that is just 1.2x it's latest operating profit. So it doesn't look like the dividend faces any threat. in fact the forecast dividend of $4.06 compares to a forecast Adjusted EPS of $15.91, so a 25% payout ratio, with the divie doubling year-on-year.

2. Looking good or not?

It's now one of the largest players in the industry and it's got some of the best margins. Okay, this is an industry with lots of consolidation (e.g. QCOM buying NXP) so they need to watch out, but it's not like they don't have scale.

Companies Latest Sales Operating Profit Return on Equity
Broadcom Ltd $16,928M 40% 3%
Intel Corporation $61,711M 40% 20%
QUALCOMM, Inc. $22,570M 30% 13%
Texas Instruments Incorporated $14,184M 47% 40%
STMicroelectronics NV (ADR) $7,401M 17% 9%
Qorvo Inc $2,975M 26% -1%
Marvell Technology Group Ltd. $2,384M 21% 6%
Skyworks Solutions Inc $3,502M 41% 26%

When we look at the valuation it's currently 16x which admittedly is at the top of it's 2 year range of 12 to 16x. Compare that to the other giants? INTC is on 13 versus a range of 12 to 16x. And QCOM is on 13x versus a 2 year range of 10 to 16x.

Sure the growth looks a little better at AVGO. But is it sufficiently better to merit a 20% premium in valuation.

Peers Valuation Forecast PE Long-term Growth Dividend Yield FCF Yield
AVGO.O $100,359M 16x 18% 2% 6%
INTC.O $186,315M 13x 9% 3% 13%
QCOM.O $79,516M 13x 11% 4% 11%
TXN.O $91,460M 22x 10% 2% 7%
STM $17,808M 24x 5% 1% 7%
QRVO.O $9,143M 13x 14% 0% 7%
MRVL.O $9,177M 16x 16% 1% 5%
SWKS.O $19,173M 16x 15% 1% 7%

Is this a sector that's underpriced versus the rest of tech? Hard to tell. Looking at the other mega-cap tech stocks, Cisco, Apple, Microsoft, Oracle, IBM, TSMC, well it's a stretch to find anyone or sector consistently over 20x.

3. Wall Street's still in love

The professionals on Wall Street have a $282.88 for Broadcom, that 15% above the current price. So it's no surprise their recommendation to clients is Buy.

It's been a relentless upgrade cycle, every quarter, with the company beating estimates the last 8 quarters straight.

4. It's a keeper

The deal to acquire Brocade still hasn't closed, but will do soon, possibly by the end of the month. It's going to grow the business by circa 10% in size, and it's got higher margins than the existing business lines.

But on the 3Q call there were a few things that migh trouble you. For example:

We operate in a relatively matured end markets that we assume likely to grow over the long-term close to GDP rates or in the low single-digits. Given our strong position for our product franchises, we do not assume market share changes to contribute to our long-term revenue growth.

On top of that they referred to 4Q as a transitional quarter and that they will change the way they give guidence. Change = given less information.

Now, the forecasts for 2018 don't look agressive, I'll admit. But the mood music is muted. So, I'm not buying the stocks today. I fear there's more chance of being disappointed in the next couple months. The downside isn't huge, fine. But I'm going to look elsewhere for now.


View the archive of Stock a Day posts at it's subreddit stockaday.

Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.

Submitted October 11, 2017 at 09:12AM by shane_stockflare
via http://ift.tt/2xxz2JQ

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