Out of all the different styles of investing and trading my favorite has to be value investing. By value investing, you gain a certain kind of confidence during volatile times and are allowed to remain calm because you know the true value of your holdings. After this years bull rally it has become very hard to find value stocks, however I believe if you look hard enough you can still find a handful of them. After an unjustified drop, Broadcom (BRCM) has become a value stock.
Broadcom is in a unique position. The valuation is cheap yet the company is involved in a huge and very popular growth sector. Broadcom's technology is in the heart of nearly every piece of technology. According to Broadcom, nearly 99.98% of all data crosses a Broadcom product. As everything becomes more connected by bluetooth and NFC, Broadcom will continue to grow. Broadcom has three different business segments: hand (mobile), home (broadband), and infrastructure.
Its hand segment includes wifi, bluetooth, and connectivity chips. These chips can be seen in many things ranging from Apple's (AAPL) iPhone and Macbook Pro, to Samsung Galaxy S4. Broadcom is also in connectivity devices that include bluetooth exercise bands. Broadcom is also looking to become more involved in the LTE movement. By choosing to stick within the mid/low end range of phones for its LTE chips, Broadcom doesn't have to compete with Qualcomm as much as it would in the high end because Qualcomm's high end Snapdragon processors simply cost too much to be put into anything but a premium phone. Hopefully Broadcom's recent acquisition of Renesas LTE portfolio will speed up its ability to produce it quad core processor as it stated in a recent conference call.
Broadcom's home segment includes STB chips and modems. The company is currently boasting about its technology in 4k tv's. While Broadcom isn't as dependent on its home segment as it is for its hand segment, its good to know Broadcom is focusing hard on continuing to grow each of its parts. Growth in the home segment is largely dependent on cable subscribers and people consuming digital content by providers such as Netflix (NFLX) and Amazon Prime.
The infrastructure segment includes products such as ethernet and knowledge-based processors. In order the strengthen this segment, last year Broadcom purchased NetLogic. While things aren't going as well as planned since the acquisition, Broadcom remains a leader in this segment and recently displaced EZchip (EZCH) as a supplier for ZTE. This is a win that gives me confidence in Broadcom's ability to innovate and continue to gain marketshare in this segment.
On a valuation basis, Broadcom is the cheapest its been since the crises of 2009. The company has marketshare in multiple growing industries, a top notch balance sheet, a growing dividend, and an incredible patent portfolio. Expected to earn $2.64 for fiscal year 13' Broadcom trades at only 9 times earnings and 8 times cash flow. Recently an analyst from Bernstein reiterated an Outperform rating with a $36 dollar price target stating the lack of traction in Broadcom's baseband business is the sole reason for the stocks underperformance. The analyst believed if new opportunities were to arise, and Broadcom were to sell of parts of its business, the connectivity business alone could be worth $10 per share. The result would lead to a smaller company trading at a higher multiple.
As cheap as Broadcom is, it would be extremely hard for Broadcom to be bought out. The B shares are controlled by management and have nearly 50% of the voting power. It is very clear that they aren't interested in a buyout by the likes of an Intel (INTC). Broadcom has many ways of rewarding shareholders and I would prefer the company stay together and simply raise the dividend or buyback shares at current levels. The continuation of Broadcom's success is tied to its entry into the LTE market for mid/low range phones, its ability to maintain marketshare in the bluetooth/wifi space and the continuation of Broadcom's ability to innovate.