The former tech darling, Broadcom (BRCM), has become a mature tech company over the past decade and now sports a market cap of over $20 billion and annual revenues in the $7 billion range. The stock has staged a big recovery off 2008 lows of $15 a share, trading over $45 a share in early 2011. Since then, the stock has suffered a bit and is now trading at about $38 a share. Revenues aren't expected to jump as they did out of the recession, but BRCM is expected to show solid but steady revenue growth in 2012 and 2013 of about 10%. Broadcom also has shown its financial strength recently and announced an 11% increase in its quarterly cash dividend to a 10 cent quarterly dividend for an annual yield of 1.1%. The valuation metrics suggest that the stock is undervalued except Street analysts, who are unusually bearish. The cheap valuations, in combination with the stock's recent underperformance and firm financial standing and BRCM's history, makes me lean toward the fact that BRCM is a buy here. Below is an in depth look at the valuation metrics and stock chart.
Valuation: Broadcom's trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below their respective recent year averages. Broadcom's current P/B ratio is 3.1 and it has averaged 3.5 over the past 5 years with a high of 4.9 and low of 2.3. Broadcom's current P/S ratio is 2.8 and it has averaged 3.1 over the past 5 years with a high of 5.4 and low of 1.8. Broadcom's current P/E ratio is 22.9 and it has ranged between 17.8 and 46.1 over the past 2 years.
Price Target: The consensus price target for the analysts who follow Broadcom is $42. That is upside of 12% from today's stock price of $37.75 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
Forward Valuation: Broadcom is currently trading at about $38 a share with analysts expecting EPS of $3.24 next year, an earnings increase of 11% y/y, for a forward P/E ratio of 11.7. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. Qualcomm (NASDAQ:QCOM) is currently trading at about $65 a share with analysts expecting EPS of $4.14 next year, an earnings increase of 10% y/y, for a forward P/E ratio of 15.8. Texas Instruments (NASDAQ:TXN) is currently trading at about $33 a share with analysts expecting EPS of $2.39 next year, an earnings increase of 37% y/y, for a forward P/E ratio of 13.7. Analog Devices (NASDAQ:ADI) is currently trading at about $40 a share with analysts expecting EPS of $2.72 next year, an earnings increase of 24% y/y, for a forward P/E ratio of 14.6. The mean forward P/E of Broadcom's competitors is 14.7 which suggests that Broadcom is undervalued relative to its publically traded competitors.
Earnings Estimates: Broadcom has beat EPS estimates every time in the past 4 quarters. The company's EPS figures have come in between 3 cents and 9 cents from consensus estimates or about 4.6% to 15.3% from analyst estimates. The company has reported earnings that have differed from analyst estimates by an OK margin which suggests that the stock may experience some upside from earnings surprises.
Price Action: Broadcom is down 7.7% over the past year, underperforming the S&P 500, which is up 13.9%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $35.34 and above its 200 day moving average, which sits at $33.83.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.