by Richard Rittorno
Continuing our look into the components inside Apple's (AAPL) latest version of the iPad, we ran a quick vitals screen and one of the companies that stood out was Broadcom (BRCM). Granted, Qualcomm (QCOM) also plays a big role in the iPad, but appears to fairly valued at this point in time. On the other hand, BRCM -- which supplies the networking, Bluetooth and the FM transceiver in the iPad -- could be worth a look on a pullback.
Broadcom is a global semiconductor solution for wired and wireless communications. The company's products deliver voice, video, data and multimedia connectivity in the home, the office and the mobile environment.
BRCM provides system-on-a-chip (SoC) and software solutions, while the communications unit provides solutions for cable, x digital subscriber line (xDSL), fiber, satellite and Internet protocol (IP) broadband networks to enable the connected home.
The company's technology is incorporated into set-top-boxes and media servers, residential modems and gateways, femtocells and wired home networking solutions.
Overall Valuation: BRCM is in the semiconductor industry and has positive earnings, so the PEG and PE ratios are the most appropriate valuation measures. The price to book ratio is excluded since it likely underestimates the value of hidden assets such as intellectual property. Therefore, BRCM seems fairly valued with a PEG value of 1.4652, in line with the semiconductor industry median of 1.35, although the PE of 22.915 is above the industry median of 14.92 at its current price of $37.99 a share.
Profitability: Based on its operating, gross and net margins, BRCM converts an above-median percentage of its revenue to profits compared to other companies in the semiconductor industry. The company is definitely profitable with an operating margin of 12.90%.
Dividend: BRCM pays an annual dividend of $0.40 which, at its current stock price, produces a yield of 1.06% at the current price of $37.99. However, BRCM's payout is below both the semiconductor industry and S&P 500 average yields of 4.13% and 1.98%, respectively.
Growth Rate: BRCM earnings have declined in spite of positive revenue growth during the past twelve months. However, the average company in the semiconductor industry also declined in earnings -- at a slower rate than BRCM.
Financial Strength: Looking at the balance sheet, BRCM holds a substantial amount of cash and cash equivalents. These liquid assets can be used to fuel growth, pay dividends and limit financial risk while BRCM takes advantage of the iPad and rumored iPhone 5 coming later this year.
Average Analyst Recommendation: Strong Buy