Among semiconductors, Broadcom (BRCM) is one of the most preferred companies on the Street with a near "strong buy" rating. Texas Instruments (TXN) and Intel (INTC) are both rated closer to a "hold." Based on my multiples analysis and DCF model, I find that all of the companies provide fair, not great, upside.
From a multiples perspective, Intel is the cheapest of the three. It trades at a respective 11.1x and 10.3x past and forward earnings while offering the highest dividend yield at 3.1%. Broadcom and Texas Instruments trade at a respective 21.1x and 17.4x forward earnings. Since I first presented my bullish case on Broadcom here, the stock has risen by 7.3%, beating the Dow Jones (DIA) by 582 basis points. Going forward, uncertainty in end market demand for semis will exacerbate volatility.
At the third-quarter earnings call, Broadcom's CEO noted strong performance but provided conservative guidance:
Broadcom executed well in the September quarter, with cutting-edge products and strong financial discipline resulting in record revenue and operating profitability above our target financial model. I'm also pleased to report we generated record cash flow from operations, surpassing 27% of revenue. Our total cash and marketable securities position of $4.2 billion also ended the quarter at record levels.
While many of our businesses set records in the September quarter, our outlook reflects near-term industry softness and uncertainty from our customers. To that end, we're maintaining a tight rein on our overall spending, as shown by our Q3 results and Q4 guidance for R&D and SG&A expenses. Broadcom has a proven track record of success across semiconductor cycles, and we've position the company to once again emerge stronger coming out of the current uncertain economic environment. Our goals remain focused on product innovation and relentless integration that enables us to grow our market share and deliver strong profitability and robust cash flow from operations.
As I anticipated, Broadcom has recovered fairly well from an overreaction to market-share decline. With a major design win in WP7, the company has clearly proved that its strong brand can weather challenging macro trends. Furthermore, Broadcom is well positioned in WiFi and has a solid record of growth.
Consensus estimates for Broadcom's EPS forecast that it will grow by 4% to $2.83 in 2011, decline by 2.8% in 2012, and then grow by 15.6% in 2013. Assuming a multiple of 15x and a conservative 2012 EPS of $2.70, the rough intrinsic value of the stock is $40.50, implying 15.5% upside.
TI has had stellar performance itself. The semiconductor-maker beat revised guidance for the fourth quarter and revenue was $150M above consensus. 24% growth in Analog was particularly noteworthy, as were December results, which benefited from minimal backlog and strong supply chain management. Utilization rates, currently at 50%, are due for a turnaround, which will cause margins to expand in the process.
Consensus estimates for TI's EPS forecast that it will decline by 15.4% to $1.87 in 2012 and then grow by 32.6% and 21% in the following two years. Modeling a CAGR of 10.7% for EPS over the next three years and then discounting backward by a WACC of 9% yields a fair value figure of $38.19, implying 17.1% upside.