Broadcom (AVGO) Upgraded to Strong Buy on Impressive Q2

On Jun 16, Broadcom Limited AVGO was upgraded to Zacks Rank #1 (Strong Buy).

The upgrade can be attributed to impressive second-quarter fiscal 2017 results. Earnings (including stock-based compensation) were $3.31 per share in the reported quarter, beating the Zacks Consensus Estimate by 29 cents.

We note that Broadcom has outperformed the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 6.73%.

Moreover, non-GAAP revenues from continuing operations were $4.201 billion, which increased 17.9% from the year-ago quarter and 1.3% on a sequential basis. The figure was better than management's guidance and also slightly better than the Zacks Consensus Estimate of $4.105 billion.
 

The robust performance drove current year estimates in the last 30 days. The Zacks Consensus Estimates for 2017 and 2018 increased 6.5% and 5.1% to $13.73 and $14.94, respectively.

We also note that Broadcom has outperformed the S&P 500 index on a year-to-date basis. While the stock returned 34.7%, the industry gained 9%.

Growth Catalysts

Broadcom continues to benefit from synergies it gained through the merger with Avago. The seasonal strength in broadband access products and sustained cloud data center spending is expected to drive top-line growth in the rest of fiscal 2017.

With one of the most diversified communications platforms in the industry, Broadcom remains well poised for healthy long-term growth. Over the next three to five years, the company's earnings are anticipated to increase at 13.60% rate.

We also believe that the company's divestiture of some of the Brocade's assets to ARRIS International and Extreme Networks will accelerate the acquisition process as well as lower leverage. The company's plan to acquire Brocade will aid it to further penetrate the FC SAN market and provide competitive edge in the long run.

Further, we note that Broadcom is one of the leading bidders for Toshiba's chip business. A stake will help the company to expand footprint in the rapidly growing NAND flash memory market, which is a key catalyst over the long term.

Other Key Picks

Applied Optoelectronics AAOI, Infineon IFNNY, and Western Digital WDC are other top-ranked stocks in the broader sector that sport the same rank as of Broadcom. You can seethe complete list of today's Zacks #1 Rank stocks here.

The long-term earnings growth rate for Applied Optoelectronics, Infineon and Western Digital are pegged at 20%, 16.38% and 4.75%, respectively.

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