Bull of the Day: Broadcom LTD (AVGO)

Do not be confused by the new "hybrid" name Broadcom Limited AVGO because this is simply the same old technology powerhouse that Avago investors have known for years -- only it's bigger and better with the completed $37 billion acquisition of Broadcom BRCM last quarter.

Based in Singapore, Broadcom Limited is a premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems. Broadcom products primarily serve four target markets: Wireless Communications, Wired Infrastructure, Enterprise Storage, and Industrial & Other.

Not Your Average Chip Maker

And AVGO is back to a Zacks #1 Rank after strong guidance about the merger as analysts respond with raised EPS estimates and price targets.

Given the more powerful lineup of Enterprise Wired and Mobile Wireless products, plus the cost synergies, analysts raised the Zacks consensus for the first full fiscal year of the combined companies (ending October 2017) from $9.66 to $11.10 in the past 60 days.

That 15% bump represents over 20% EPS growth in that fiscal year, reflecting a sub-13X P/E multiple for a key Apple AAPL supplier in mobile and strong broadband network builder for top global enterprises.

Strength in Numbers

I have owned AVGO for nearly two years now for the Zacks FTM Portfolio and was happy to buy more during the correction of January. My belief was that large-cap Technology stocks would hold up the best, although that wasn't true for the widely-held AAPL. My instructions to my followers have been to always buy it anywhere near $120 and we received several great swing trading opportunities in Q4 and Q1.

One of the things that stood out then was that while many Tech companies were taking a beating, especially those in the Apple supply chain, AVGO shares held up very well. Here's a snapshot of the 1-year performance compared to various other sectors and indexes (chart courtesy of StockCharts.com)...

Broadcom's focus on multiple target markets and geographies mitigates operating risks and lessens the exposure to volatility in any single market. The Wireless Communications segment (33% of first-quarter fiscal 2016 revenues before the Broadcom acquisition) serves the smartphone, handset and base station infrastructure markets with leading-edge products that include Film Bulk Acoustic Resonator (FBAR) filters, power amplifiers and front end modules.

It supports the wireless industry with a broad variety of RF (radio frequency) semiconductor devices. Additionally the segment also provides a variety of optoelectronic sensors for mobile handset applications.

FBAR (Film Bulk Acoustic Resonator) filters are a form of bulk acoustic wave (BAW) filter that have superior performance with steeper rejection curves compared to surface acoustic wave (SAW) filters. These are essential components of the mobile revolution and the BAW filter market has tremendous growth potential in China owing to the country's 4G build-out and Wi-Fi band proliferation.

Analysts On Board

Oppenheimer analysts recently noted that while iPhone 6S inventory excess is expected to linger into Broadcom's fiscal second quarter, the Wireless segment should "trough" this quarter, before rebounding in F3Q ahead of Apple's iPhone 7 launch where they see 20%-plus content gains in the iPhone 7 vs. iP6S. They concluded...

We see 30%-plus accretion from the acquisition and conservatively see $13-plus of earnings power in CY17 for the combined company as AVGO integrates BRCM into its disciplined business model. We remain buyers here with a $170 target.

Other investment banks raising estimates and price targets included these heavy hitters...

Goldman bumping from $155 to $175

Deutsche from $157 to $180

Bank of America from $180 to $200

And SunTrust analysts last week talked about what they saw as a "big disconnect" between Broadcom's strong EPS growth and low valuation. They saw another beat-and-raise quarter the result of solid sales execution and even better cost control that they expect will persist.

The analysts raised their 2016 EPS estimate to $11 and 2017 EPS projection to $12.57 while boosting their price target from $168 to $189 based on a 15-times forward multiple. They believe this is conservative given the company's long-term EPS growth rate of 17%, including acquisitions.

Cooker's bottom line: The new AVGO, Broadcom LTD, is one of best Technology names to own in any market environment. Always buy the dips.

Disclosure: I own shares of AVGO for the Zacks FTM Portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money (FTM) portfolio.
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