Credit Suisse Discusses Broadcom's Leverage Situation

Broadcom Ltd AVGO reported its FQ3 results ahead of expectations and raised its guidance for FQ4. The EPS upside could be even higher, Credit Suisse’s John W. Pitzer said in a report. He reiterated an Outperform rating on the company, with a price target of $200.

Following Broadcom’s beat and raise, analyst Pitzer revised the EPS estimates higher for 2016 and 2017 from $11.67 to $12.08 and from $13.34 to $14.13, respectively.

Leverage Situation

Pitzer mentioned that although the 2017 EPS estimate had been raised by ~6 percent, there could be more upside in Broadcom “than any other name in our coverage universe.” He added that the upside is on account of:

• GM leverage, as the company optimizes its product portfolio
• OpM leverage, as Broadcom executes on continued M&A synergies
• Lower interest expense, as the Company de-leverages

Wireless Versus Wireline

The only concern area in the quarter was Wired, which accounts for 54.3 percent of revenues, and was sequentially flat and below the guidance of ~2 percent growth. The analyst noted that this was due to supply constraints in STB, which prevented Broadcom from shipping to demand, which is “a high class problem.”

“Wireless (26.5% of Rev) content story at AAPL still on track with Wireless up 27.3% q/q in F3Q and guided up >30% q/q,” the Credit Suisse report stated.

Guidance for both Enterprise Storage and Industrial seem “exceedingly conservative,” and provide “more cushion,” Pitzer commented.

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