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Broadcom (AVGO: Nasdaq)
By Credit Suisse ($177.09, Sept. 2, 2016)

We are raising our calendar 2016/2017 earnings-per-share estimates for Broadcom from $11.67/$13.34, respectively, to $12.08/$14.13, respectively.

While high expectations into the fiscal-third-quarter and year-to-date stock performance of up 21.5% might dampen Broadcom (ticker: AVGO ) stock’s reaction near term -- we view this as very shortsighted -- year-to-date forward-12-months EPS estimates on Broadcom have increased about 20% versus aggregate semiconductors of about 5%, and importantly even though we are raising our calendar 2017 EPS estimate by about 6%, we still see more EPS upside in Broadcom from here than any other name in our coverage universe driven by: 1) gross-margin leverage as the company optimizes its product portfolio; 2) operating-margin leverage as the company executes on continued merger & acquisition (M&A) synergies; and 3) lower interest expense as the company de-leverages.

[We rate Broadcom at Outperform with a $200 price target.] The only blemish in the fiscal third quarter was Wired (54.3% of revenue), which was flat quarter-over-quarter below guidance of up about 2% quarter-over-quarter as supply constraints in set-top boxes (STB) prevented Broadcom from shipping to demand -- we view this as a high-class problem. Wireless (26.5% of revenue) content story at Apple ( AAPL ) is still on track with Wireless up 27.3% quarter-over-quarter in the quarter and guided up over 30% quarter-over-quarter. We see Enterprise Storage (13.9% of revenue) and Industrial (5.3% of revenue) guidance of flattish and down 20% quarter-over-quarter respectively as exceedingly conservative -- more cushion.

Broadcom stock is currently trading at a price/earnings multiple including stock-based compensation and enterprise value (EV)/earnings before interest, taxes, depreciation and amortization (Ebitda) on calendar 2017 of 15.5 times and 11.9 times, respectively, versus peers at 18.9 times and 12.2 times, respectively. Our only legitimate criticism -- with Debt-to-Ebitda of 1.8 times levered on estimated calendar 2017 Ebitda we see ample “dry powder” to pursue both M&A and an aggressive buyback program especially as stock-based compensation has increased from $57 million a quarter to $213 million [with the Broadcom-Avago Technologies combination (closed February).]

-- John W. Pitzer
-- Nickie Yue
-- William Miller
 Broadcom EPS Seen Surging Through 2017

Broadcom (AVGO: Nasdaq) By Credit Suisse ($177.


