Broadcom To Investors: We Aren't Getting Into The Systems Business

Broadcom Ltd (NASDAQ: AVGO) seems poised to continue generating mid-teens EPS growth over next several years, RBC Capital Markets’ Amit Daryanani said in a report. He reiterated a Top Pick rating on the company, with price target of $190.

Broadcom projected its October-quarter revenue at the high-end of its prior range of $4.025–$4.175 billion, while maintaining its EPS outlook. Daryanani believes there is “an upside bias across its P&L.”

Payback On The Deal

Broadcom announced plans to acquire Brocade Communications Systems, Inc. (NASDAQ: BRCD) for $12.75 per share and expects the deal to be immediately accretive.

“We think that AVGO did a splendid job on the call assuring investors that they were not getting into the systems business and competing with downstream OEM customers, and we see this achieved through the anticipated divestiture of BRCD IP Networking business (~$1.3 billion revenues in FY18),” Daryanani wrote.

Broadcom also indicated that it plans to retain the FC SAN business. The analyst considers the announcement of IP networking divestiture as “an incremental positive” and expects the company to receive more than $2.0 billion for these assets. This would materially lower the deal price and ensure ~10 percent accretion.

The deal is expected to close in late FY17 and the acquisition could “prove to be exceptionally attractive,” Daryanani added.

In a separate note, Argus’ Jim Kelleher mentioned the risks associated with the Broadcom-Brocade deal.