|Broadcom: Not a Bear to Be Found |
By Teresa Rivas
Dec. 7, 2017 11:53 a.m. ET
Share of Broadcom ( AVGO) are higher on Thursday, after flipping between gains and losses last night following its fourth-quarter earnings report.
Analysts are weighing in on the stock today, and there wasn't a bear to be found, as the Street cheered the results and a potential deal with Qualcomm ( QCOM).
BMO Capital Market's Ambrish Srivastava reiterated an Outperform rating and $330 price target:
Results were in line and guidance was better than expected. The company announced a large dividend increase of 72%, demonstrating confidence in its ability to generate and grow FCF, sustainably. Broadcom’s long-term model is going higher on several metrics as the model gets more profitable. Wireless is expected to be stronger in F1Q vs. the normal seasonal decline given the shift in ramp of a marquee product. Canaccord's T. Michael Walkley reiterated a Buy rating and raised his price target to $317 from $313:
Due to the delayed production ramp for iPhone X and an extra week resulting in a 14 week Q1/F2018, we expect wireless revenue to increase during the January quarter versus a more typical seasonal decline of 12%. Consistent with our expectation, Broadcom materially increased their dividend to $1.75/quarter and reiterated their target of paying out 50% of FCF on a TTM basis. In addition, management increased their long-term model targets with gross margin increased from 60% to 65% operating margin to 47.5% from 45%, and FCF to 40% of net revenue from 35%. Management addressed its $70 bid for Qualcomm but did not provide new details or take any questions regarding the proposed merger. We view a potential Qualcomm acquisition up to even $100 per share as accretive to our increased Broadcom estimates, and the combination would create the third largest semiconductor company in terms of revenue, likely well positioned for strong long-term earnings and cash flow generation. Credit Suisse's John Pitzer reiterated an Outperform rating and $335 price target:
AVGO modestly BEAT F4Q Rev/EPS vrs Street and an 11/02 pos-pre and guided F1Q well ahead of CS/Street even adjusting for BRCD and a 14 week F1Q. More importantly, the Company unexpectedly increased LT Operating Targets - GM to 65% from > 60%, OpM to 47.5% from 45% and FCFM to 40% from 35%. We are raising our FY18/19 EPS to $19.72/$21.07 from $19.13/$20.70 vrs Street of $18.21/$19.32, reiterating our OP and $335 PT. While risks include better than seasonal growth in core AVGO for F1Q driven by wireless that might be viewed as aggressive relative to investor concerns on iPhone8 and X, we see continued Rev upside for core franchises thru FY18 driven by additional FBAR content in handsets, the beginnings of a 802.11ax product cycle in connectivity, 10/50G in wired, and an AI ASICs business which is proving to be larger than the Company originally anticipated. Jefferies' Mark Lipacis reiterated a Buy rating and raised his price target to $320 from $315:
AVGO beat & raised, raised its dividend more than expected (72% vs. 50%), and raised its long-term operating model. It also expects regulatory concerns regarding the potential acquisition of QCOM to be addressed in a timely manner. We think AVGO's FCF growth improves quality of earnings and translates to increased capital return. We've shown that high FCF growth leads to outperformance and increased capital return translates to P/E expansion. Loop Capital's Betsy Van Hess reiterated a Buy rating and raised her price target from $302 to $330:
While there has been no change to the healthy underlying fundamentals for semiconductors, we have seen a sector rotation in the last few weeks with the SOX declining about -6% vs. the 2% increase of the DJI over the same time period. We believe AVGO’s positive commentary on the call and on our call back with management yesterday bodes well for the overall sector, particularly those in the iPhone 8 and iPhone X supply chain as AVGOexpects FQ1 (Jan) 2018 Wireless revenue to buck seasonal trends. While AVGOsaid it remains their “strong preference to engage in a constructive dialogue” with Qualcomm (QCOM: $64.98 - NR), we think this is unlikely and look to the proxy fight as AVGO attempts to get 11 independent individuals elected to QCOM’s board at its annual meeting on March 6, 2018. We maintain our bullish view on the overall sector with AVGO continuing to be one of our top big cap picks for C2018. Oppenheimer's Rick Schafer reiterated an Outperform rating and raised his price target to $315 from $300:
We raise ests and PT on AVGO following F4Q (Oct.) results of $4.85B/$4.59, above Street's $4.83B/$4.52. F1Q (Jan.) guidance of $5.3B was well ahead of consensus $4.8B, even after accounting for a 14th week. Wireless led the upside, despite some investor fears to the contrary. Wireless is expected up Q/Q in F1Q as iP8/X ramp later than normal. Mgmt raised long-term GM/OM/FCF target to leading 65%/47.5%/40% and increased dividend 72%. Mgmt continues to execute on virtuous cycle of capital returns and margin/FCF accretive M&A, with organic rev. growth above 5% long-term target as icing on the cake. We see any potential QCOM deal as a highly accretive. Raymond James's Chris Caso reiterated a Strong Buy rating and $335 price target:
Broadcom posted a strong quarter and guidance, beating our estimates and consensus for January after normalizing for the Brocade acquisition and an extra week in the quarter. The company didn't provide any color regarding the proposed Qualcomm transaction or their change in domicile. The dividend increase was greater than we expected, and now implies a 2.7% yield - slightly above Intel and Texas Instruments, but we expect Broadcom's yield to move well above 3% next year on increasing cash flow. Looking forward, we are taking a more cautious approach to April given the absence of the extra week and uncertainty regarding Apple shipments after the strong January. SunTrust Robinson Humphrey's William Stein reiterated a Buy rating and $325 price target:
AVGO produced beat & raise results, but more importantly lifted its target model & raised the dividend substantially. The poster child of our industrialization of semis thesis is exemplifying its benefits: step function growth in FCF & EPS leading to higher stock price. We raise CY17 to $17.34 (from $16.89), and CY18 to $19.02 (from $18.97). PT remains $325 based on expected value weighted average of (a) buying QCOM + NXPI, (b) buying QCOM ex-NXPI, (c) buying another asset; and (d) completing no incremental M&A in the near-term. Broadcom is up 1% to $266.50 in recent trading.