Buying Brocade Boosts Broadcom's Price Target At Pacific Crest

Following Broadcom Ltd's AVGO agreement to buy Brocade Communications Systems, Inc. BRCD, KeyBanc raised its price target for the former to $215 from $200. The rating was maintained at Outperform.

Analyst John Vinh is of the view that the proposed buy could allow Broadcom monetize the entire Fibre channel value chain and provide meaningful earnings per share accretion. Accordingly, the company could see outsized earnings growth, the analyst noted.

KeyBanc noted that Broadcom struck the deal for $12.75 per share in cash, representing a total enterprise value of $5.9 billion. The firm sees logic in the deal, as Brocade's Fiber channel switching business could be complementary to Broadcom's existing storage business. To avoid customer conflict, the firm said IP networking will be divested.

Assuming Brocade will add $900 million in EBITDA to fiscal year 2018, the firm estimates a $1.06 per share contribution from it, for combined earnings power of $16.58.

KeyBanc also noted that Broadcom raised the low-end of its fiscal year fourth quarter revenue guidance to $4.1 billion from $4.025 billion but maintained the high end at $4.175 billion. This compares favorably to the consensus estimates and the firm's estimates. Broadcom is also seeking to raise its operating margin target to 45 percent from 40 percent, given Brocade's Fiber channel gross margins of over 70 percent and operating margins of over 50 percent.