Why Broadcom Is A Good Bet Even At 52-Week Highs

| About: Broadcom Limited (AVGO)
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Broadcom is focusing on growth areas such as the Internet of Things, wireless connectivity and wearables with new products.

Broadcom is cutting jobs to improve the cost structure and move away from a low-margin business such as cellular baseband.

Broadcom's fundamentals, dividend yield and cash flow are all strong, making the stock worth considering for the long run.

Broadcom (BRCM) made a smart move earlier this year when it decided to exit its cellular chip baseband business. As a result of that move, Broadcom shares have gained more than 30% in 2014, and the company's results have been improving. As a result, Broadcom was able to please Wall Street with its second quarter results, as its revenue and earnings topped analysts' expectations.

Moreover, the revenue guidance given for the third quarter also was above Wall Street consensus. In addition, Broadcom announced that it will cut around 2,500 jobs worldwide to restructure itself and focus on growth areas. According to Broadcom CEO Scott McGregor, "We made the decision to pursue a wind-down, which minimizes the ongoing losses from the business, and enables us to focus on our core strengths."

Introducing products for the future

Now, Broadcom is focusing on product introductions in growth areas. The company is set to introduce its new 25 Gigabit and 50 Gigabit Ethernet technology that will allow the cost-efficient scaling of network bandwidth. This product will be used in server and storage endpoints in next-generation cloud infrastructure. Broadcom has made this move by keeping an eye on the future as it is estimated that workloads will be more than the present capacity of 10 or 40 Gigabits per second. This will allow Broadcom to enhance work efficiency at reduced costs.

Broadcom also is enhancing video quality with its transition to high efficiency video coding (HEVC) and Ultra HD. In partnership with Sagemcom, Oi and NETServicos, Broadcom is powering live Ultra HD broadcast of sports events. Going forward, management sees this as an important area that will drive its growth in the coming years.

In addition, Broadcom is about to launch solutions for the Internet of Things and wearables. It is developing a low-power connectivity technology for next generation wearables that will support both iBeacon and HomeKit. Along with this, it will introduce a technology for wireless charging with its first generations SoCs.

Already, the company is making good moves in the smart homes market, and it has also gained some customers. According to a Broadcom press release:

Netatmo, an innovation company developing consumer electronics for a better and connected lifestyle, has selected the Broadcom Wireless Internet Connectivity for Embedded Devices Wi-Fi technology to enable its smartphone-controlled thermostat by French designer Philippe Starck. The evolution of IoT is driving rising demand for connectivity in a variety of applications, particularly smart appliances, a market expected to reach $35B by 2020.

Hence, Broadcom is progressing in the right direction by investing in technologies that will gain acceptance in the future.

Moreover, in the broadband business, its sales reached multi-year highs during the second quarter, driven by cable, DSL and PON. Broadcom has also launched its latest generation LTE offerings, which are optimized for bill of materials cost. It will also leverage its Wi-Fi, DSL, cable and PON solutions to tap this market. Broadcom also claims to power the world's fastest home Wi-Fi router with its latest 5G WiFi XStream platform. Going forward, the company sees strength across its set-top box and broadband modem platforms. Hence, Broadcom is seeing broad-based strength across its different end markets and is bringing out new products to tap them.

Fundamental view

What's more impressive is the fact that Broadcom has a sound valuation. It has a trailing P/E of 57, which is higher than the industry P/E of 29. But its forward P/E of 11.44 means that its earnings are going to get better in the future. In addition, a PEG ratio of just 0.92, below 1, is also impressive and signifies growth.

Moreover, Broadcom has a strong balance sheet with cash of $3.13 billion and debt of $1.4 billion. A current ratio of 2.94 also indicates the same. Next, having generated operating cash of $1.89 billion and levered free cash flow of $1.36 billion in the last year, Broadcom seems well-positioned to keep paying its dividend of 1.30%.

All in all, the company looks well-positioned from different angles, and it will be a good idea for investors to hold on to it even though it is trading close to its 52-week highs.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.