Broadcom's Q3 Should At Least Meet Expectations, Says D.A. Davidson

Thomas Diffely of D.A. Davidson said he expects the third-quarter results of Broadcom Ltd AVGO should at least meet expectations.

Semiconductor company Broadcom is expected to report its third-quarter results on September 1 after market close. D.A. Davidson sees pro-forma EPS of $2.77 and revenue of $3.740 billion, versus the Street's mean of $2.78 and $3.758 billion, respectively.

Diffely projects wireless (22 percent of revenue) revenue to grow over 20 percent quarter-over-quarter driven by the beginning of a multi-quarter Apple iPhone 7 ramp. Similarly, the analyst expects a modest sequential boost in wired Infrastructure (58 percent of revenue) on ongoing data center build-outs and sustained demand for fiber optics.

However, the analyst sees revenue declines in enterprise storage (15 percent of revenue) and industrial (5 percent of revenue) units.

Related Link: Credit Suisse On Broadcom: More Confident On Earnings Than Revenues

"While we are not expecting significant cost reduction in the quarter (the acquisition synergies were ahead of schedule last quarter) the company has a history of exceeding cost synergies and posting EPS upside," Diffely wrote in a note.

"While pro-forma gross margins are already a healthy 60 percent (and a less favorable product mix should offset the sequential revenue growth and keep gross margins flat in FQ3) we project operating margins will expand over 100 basis points in both FQ3 and FQ4 and hit 40 percent by the end of FY'16," the analyst continued.

For the fourth quarter, the analyst sees a "healthy" 7 percent revenue growth to $4.00 billion and pro-forma EPS of $3.05, which comes in slightly below the Street's $4.05 billion and $3.17, respectively.

However, Diffely noted there could be upside to the estimates given continual strength in wired, an anticipated recovery in "depressed" enterprise business and a continuation of a very strong ramp for the new iPhone.

Diffely reiterated his Buy rating and $190 price target, saying, "AVGO's strong track record of exceeding operational expectations following large acquisitions combined with our view calling for a nice 2H rebound in the Wireless segment keeps us bullish on the name."

Shares of Broadcom closed Monday's regular trading at $177.40, and the analyst's $190 price target implies a potential return of 7 percent.