What To Expect From Broadcom's Earnings Report

| About: Broadcom Limited (AVGO)

Summary

AVGO is scheduled to report its second quarter 2016 financial results on Thursday, June 2, after market close.

According to 28 analysts' average estimate, AVGO is expected to post a profit of $2.38 a share, 11.7% rise from its actual earnings for the same quarter a year ago.

I see continued high growth prospects for the company. Avago has shown faster growth than the market in the last few years through acquisitions and organic development.

AVGO's valuation is very good, the forward P/E is very low at 12.19, its current ratio is very high at 4.60, and its PEG ratio is very low at 0.90.

The average target price of the top analysts is at $176.89, an upside of 15.6% from its May 26 close price, which appears reasonable, in my opinion.

Broadcom Limited (NASDAQ:AVGO) is the successor to Avago Technologies. Following Avago's acquisition of Broadcom Corporation on February 1, 2016, Broadcom Limited became the ultimate parent company of Avago and BRCM.

On March 3, AVGO reported its first-quarter fiscal 2016 financial results. This was the first release of financial results following the acquisition and relates solely to the predecessor, Avago, for the fiscal periods before the acquisition. In the quarter, AVGO beat earnings-per-share expectations by $0.11 (4.8%). Revenue climbed 8% year-over-year to $1.78 billion, exceeding the consensus estimates of $1.75 billion.

In my view, AVGO's acquisition of Broadcom was a smart move that will benefit the company as it provides significant scale, and further diversifies AVGO's business. The company has indicated its plan to achieve its stated synergy target of $750 million in six quarters after the deal close, and it is divesting non-core business to optimize its cost structure. By this strategy, on April 28, Broadcom and Cypress Semiconductor (NASDAQ:CY) announced the signing of a definitive agreement under which Cypress will acquire Broadcom's Wireless Internet of Things business and related assets in an all-cash transaction valued at $550 million.

AVGO is scheduled to report its second quarter 2016 financial results on Thursday, June 02, after market close. According to 28 analysts' average estimate, AVGO is expected to post a profit of $2.38 a share, an 11.7% rise from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $2.45 a share while the lowest is for a profit of $2.35 a share, not a big difference. Revenue for the first quarter is expected to increase 115.7% year over year to $3.55 billion, according to 27 analysts' average estimate. There was one up revision during the last seven days and one earnings-per-share up revision and two down revisions during the last 30 days. Since AVGO has shown earnings per share surprise in all its last eleven quarters, as shown in the table below, there is a good chance that the company will beat estimates also in the second quarter.

Source: Yahoo Finance

I see continued high growth prospects for the company. Avago has shown faster growth than the market in the last few years through acquisitions and organic development. AVGO has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was very high at 26.7%, and the average earnings-per-share growth was also very high at 24%. The average annual estimated EPS growth for the next five years is high at 18.25%.

According to the company, in this second quarter, it is expecting strength on multiple fronts in the wired segment. It is expecting growth to resume in its custom ASIC business, driven by increasing shipments to wireless base stations and the start of a product ramp into the new data center switches. AVGO's standard ASSP [Application-Specific Standard Parts] switching, routing, and physical layer products are seeing an increase from enterprise demand. Broadband carrier access is experiencing strong activity, driven by fiber-to-the-home and DSL deployments in multiple regions, including China. The company also expects its set-top box business also to benefit from some seasonal refresh cycles at key customers. In aggregate, it expects second quarter revenues from wired segment to be approximately 55% of its total revenue from continuing operations. AVGO also noted it is already pre-building FBAR parts for the iPhone7 ramp which it expects to start shipping in September 2016. It expects at least 20% content growth in the new model. According to BARRON'S, Taiwan's Economic Daily said on Monday, May 23, that Apple (NASDAQ:AAPL) had asked its suppliers to produce 72 to 78 million new iPhones by the end of the year, the highest production target in about two years. The Street had expected only 65 million iPhone 7s to be produced this year. That is a good development for Apple but also for its suppliers like AVGO, Skyworks Solutions (NASDAQ:SWKS), and Qorvo (NASDAQ:QRVO).

Valuation

Since the beginning of the year, AVGO's stock is up 5.4% while the S&P 500 Index has increased 2.3%, and the Nasdaq Composite Index has lost 2.1%. Moreover, since the beginning of 2012, AVGO's stock has gained an astounding 391%. In this period, the S&P 500 Index has increased 66.2%, and the Nasdaq Composite Index has risen 88.2%. According to TipRanks, the average target price of the top analysts is at $176.89, an upside of 15.6% from its May 26 close price, which appears reasonable, in my opinion.

AVGO Daily Chart

Click to enlarge

AVGO Weekly Chart

Click to enlarge

Charts: TradeStation Group, Inc.

AVGO's valuation is very good, the forward P/E is very low at 12.19, and its current ratio is very high at 4.60. Furthermore, its PEG ratio is very low at 0.90, the seventh lowest among all S&P 500 tech companies. The PEG ratio - price/earnings to growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means the stock is more undervalued.

The 10 S&P 500 tech stocks with the lowest PEG ratio

Source: Portfolio123

In addition, AVGO's Margins, Growth Rates and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.

Click to enlarge

Click to enlarge

Source: Portfolio123

In March 2016, AVGO raised its quarterly dividend by 11.4% to $0.49. The forward annual dividend yield is at 1.28%, and the payout ratio is only 31.8%. The annual rate of dividend growth over the past three years was very high at 40.4%, and over the last five years was also very high at 45.1%.

AVGO Dividend Chart

AVGO Dividend data by YCharts

Summary

AVGO is scheduled to report its second quarter 2016 financial results on Thursday, June 02, after market close. According to 28 analysts' average estimate, AVGO is expected to post a profit of $2.38 a share, an 11.7% rise from its actual earnings for the same quarter a year ago. Revenue for the first quarter is expected to increase 115.7% year over year to $3.55 billion, according to 27 analysts' average estimate. Since AVGO has shown earnings per share surprise in all its last eleven quarters, there is a good chance that the company will beat estimates also in the second quarter. I see continued high growth prospects for the company. Avago has shown faster growth than the market in the last few years through acquisitions and organic development. AVGO's valuation is very good, the forward P/E is very low at 12.19, its current ratio is very high at 4.60, and its PEG ratio is very low at 0.90. The average target price of the top analysts is at $176.89, an upside of 15.6% from its May 26 close price, which appears reasonable, in my opinion.

Disclosure: I am/we are long AVGO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.