Broadcom Delivers Beat And Raise Quarter, Warns Current Growth Is Unlikely To Be Sustainable

Deutsche Bank is bullish on Broadcom Ltd AVGO, which delivered strong first quarter results, driven by solid growth in enterprise storage and margins. Similarly, the guidance was better than expected on a vast majority of metrics.

Quarter's Gist

• First-quarter adjusted EPS of $3.63 versus the estimated $3.46.
• Sales came in at $4.139 billion versus the estimated $4.08 billion.
• For the second quarter, Broadcom Sees adjusted sales at $4.1 billion +/- $75 million versus the $3.9 billion estimate.

“Continued content gains in Wireless (both RF and WiFi) as well as Cloud driven growth (switch/router/ASICs) remain unique growth drivers for Broadcom,” analyst Ross Seymore wrote in a note.

That said, Broadcom warned that its 15 percent year-over-year growth is unlikely to be sustainable but is not a prerequisite to hit its long-term goals of about 45 percent operating margins and 35 percent plus free cash flow (FCF) margin.

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Analyst's Commentary

However, Seymore reiterated his Buy rating as he is most impressed with the company’s improving FCF generation and expects Broadcom improving FCF margin to about 35 percent in calendar year 2017 versus 22 percent in 2016. The strong FCF growth, coupled with solid topline, pave way for significant dividend increases.

“This combination of strong fundamentals and rising cash returns to shareholders should further shrink the ~25 percent valuation discount vs. high quality peers,” Seymore highlighted.

At last check, shares of Broadcom had risen 2.68 percent to $220.90. The analyst raised his price target by $20 to $255.