North America

Earnings Preview: Broadcom Limited Q4 2016 (AVGO)

By: Craig Bowles

Overview

Broadcom Limited (AVGO) is slated to report 4Q 2016 earnings after the close on Thursday, December 8th. 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.

avgop 

Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS): The Street estimate is $2.89 (range $2.86 to $2.93). (Yahoo! Finance)
  • Revenues: Company guidance is $4.100 bln to $4.175 bln (updated in November). Analysts expect $4.11 bln (range $4.08 bln to $4.15 bln).
  • Revenue Guidance for 1Q 2017: Expectations are for $3.96 bln (range $3.88 bln to $4.08 bln).
  • Price/Sales of 3.5 vs the 5-year average 5.3; Price/Book of 3.5 compares to a 5.3 5-year average; Price/Cash Flow of 22.4 compares to a 5-year average of 18.8. Dividend yield of 1.1% compares to a 5-year average of 1.5%.
  • Analysts are bullish on Broadcom with 36 Buy, 2 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Broadcom insiders have sold 34,519 shares the last three months and 17,871,041 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.
  • Import Price Index: Semiconductor manufacturing firmed up in 2016 after a 3+ year decline. (Source: St. Louis Fed)
  • The Taiwan dollar, a leading indicator of semiconductor prices, tested 2008 lows in January before improving. (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), PMC-Sierra (PMCS) and EZchip Semiconductor (EZCH).
  • Broadcom shares have a 1-day average price change on earnings of 4.14% if pre-Avago Technologies merger price moves are included. Options are pricing in an implied move of 6.36% off earnings.

Recent News

  • 11/21: Pacific Crest notes Apple (AAPL) still commands 25% of Broadcom’s revenue, according to a post on marketrealist.com.
  • 11/09: Bernstein likes Broadcom following the Trump victory, according to a post on Barron’s.com.
  • 11/02: Wells Fargo thinks Broadcom Limited is paying fair value for Brocade Communications Systems (BRCD) at $5.9 Billion and the decision to sell Brocade’s IP network business will send ripples through the industry, according to a post on Barron’s.com.
  • 10/07: RBC Capital Markets sees Broadcom as a beneficiary of the increased cloud spending this year from last year’s pace, according to a post on Barron’s.com.

Technical Review

Broadcom stock made an all-time high at $179.42 on August 30, 2016 and has consolidated since. The stock has found pullback support at around the 200-day moving average for the past few years and below that is the $150 area. Point and figure technicians have a bullish price objective of $201.  (Chart courtesy of StockCharts.com)

avgoc

Summary

Broadcom Limited purchased Brocade Communications Systems for $5.9 bln was funded by short-term borrowing, so hopefully the quickly rising debt load doesn’t become a burden with rates rising. Over the last year, Broadcom has beaten estimates by an average of 15c. Estimize consensus for Non-GAAP EPS of $3.41 on revenue of $4.129 bln compares to analyst consensus of $2.89 on revenue of $4.11 bln. Market participants will also focus on next quarter’s revenue guidance.

 

DISCLAIMER:  By using this report, you acknowledge that Selerity, Inc. is in no way liable for losses or gains arising out of commentary, analysis, and or data in this report. Your investment decisions and recommendations are made entirely at your discretion. Selerity does not own securities in companies that they write about, is not an investment adviser, and the content contained herein is not an endorsement to buy or sell any securities. No content published as part of this report constitutes a recommendation that any particular investment, security, portfolio of securities, transaction or investment strategy is suitable for any specific person.