North America

Earnings Preview: Broadcom Limited Q3 2017 (AVGO)

By: Craig Bowles

Overview

Broadcom Limited (AVGO) is slated to report 3Q 2017 earnings after the close on Thursday, August 24th. The earnings release is expected at approximately 4:00 p.m. ET with a 5:00 p.m. conference call webcast at Broadcom Investor Relations. Avago Technologies Ltd. (AVGO) completed their purchase of Broadcom Corp. (BRCM) on February 1, 2016 and the name was changed to Broadcom Limited. Being a component of the S&P 500 and NASDAQ 100 indices, results can affect futures.

Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS): The Street estimate is $4.03 (range $4.00 to $4.11). (Yahoo! Finance) Consensus was $3.67 three months ago.
  • Revenues: Company guidance is $4.375 bln to $4.525 bln. Analysts expect $4.46 bln. Consensus was $4.26 bln three months ago.
  • Revenue Guidance for 4Q 2017: Expectations are for $4.79 bln (range $4.51 bln to $5.10 bln).
  • Price/Sales of 6.7 vs the 5-year average 5.2; Price/Book of 5.3 compares to a 5-year average 5.8; Price/Cash Flow of 20.8 compares to a 5-year average of 21.1. Dividend yield of 1.4% compares to a 5-year average of 1.5%.
  • Analysts are bullish on Broadcom with 33 Buy, 1 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Broadcom insiders sold 46,528 (241,953 last qtr) shares the last three months and 9,479,565 shares in the past year. (source: NASDAQ.com) Avago’s $37 billion merger with Broadcom was funded by $17 billion in cash and $20 billion in stock. To raise that cash, Avago took on $9 billion in new debt. A $6.5 billion bridge loan was used for the Brocade acquisition. Future funding of buybacks has not been mentioned since halted in 2014.
  • Import Price Index: Semiconductor manufacturing’s multi-year decline may have reached a downside limit in the first half of 2017 given the recent sharp bounce. (Source: St. Louis Fed)
  • The Taiwan dollar, a leading indicator of semiconductor prices, tested 2008 lows in January 2016 before rebounding. 2017 broke above the downtrend. (Source: XE.com)
  • Broadcom results are compared to and could impact chip providers, such as Intel (INTC), Advanced Micro Devices (AMD), Qualcomm (QCOM), MIPS Technologies (MIPS), Marvell Technology (MRVL), MaxLinear (MXL), Western Digital (WDC), PMC-Sierra (PMCS) and EZchip Semiconductor (EZCH).
  • Broadcom shares have a 1-day average price change on earnings of 5.20% if pre-Avago Technologies merger price moves are included. Options are pricing in an implied move of 5.58% off earnings.

Recent News

  • 08/17: Needham thinks Cisco’s disappointing results in switching, routing, and security products could have implications for others in the industry. Macquarie is less concerned. Broadcom is an important vendor to Cisco and other networkers, according to a post on Barron’s.com.
  • 08/16: Analysts underestimate Broadcom’s margins and the company has a long history of outperforming the analyst consensus, according to a post on SeekingAlpha.com.
  • 08/01: Morgan Stanley has an Overweight rating on Broadcom while noting the company isn’t as big a player in China and seeing steadily increasing margins, according to a post on Barron’s.com.
  • 06/29: Bernstein sees Broadcom as a safe haven amidst rising expectations for the chip industry that leave little room for error, according to a post on Barron’s.com.
  • 06/02: Analysts are intrigued by what Broadcom is suggesting is a big jump up in the amount of revenue it will get from Apple’s next iPhone, according to a post on Barron’s.com.

Technical Review

Broadcom stock rose 135% from early 2016 to July’s $258.49 high. The current balance area is centered around $240 with the 200-day moving average back down at $212.  (Chart courtesy of StockCharts.com)

Summary

Broadcom Limited is showing increased margins as others in the industry contract. Speculation is for a 40% increase to 8 components for Apple’s next iPhone but that’s later this year. Broadcom has beaten estimates by an average of 14c the past four quarters. Estimize consensus for Non-GAAP EPS of $4.08 on revenue of $4.482 bln compares to analyst consensus of $4.03 on revenue of $4.46 bln. Market participants will also focus on next quarter’s revenue guidance.

 

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