Broadcom Analysts Downplay Execution Risks, Reduced Transparency Following Strong Q4, Dividend Hike

Despite the sell-side's neutral take ahead of Broadcom Inc (NASDAQ: AVGO)'s fiscal-year fourth-quarter results, the company beat earnings estimates and issued upbeat revenue guidance for the full-year 2019. The company declared a $2.65 per share dividend, up from the prior $1.75 dividend.

The Analysts

• Wells Fargo analyst Aaron Rakers has a Market Perform rating and $265 price target for Broadcom.
• Raymond James analyst Chris Caso reiterated his Market Perform rating for the shares.
• BMO Capital's Ambrish Srivastava continued to rate shares a Market Perform but increased the price target from $230 to $250.
• MKM Partners analyst Ruben Roy has a Buy rating and hiked the price target from $255 to $280.
• Bank of America Merrill Lynch analyst Vivek Arya reiterated a Buy rating and $300 price target.

Broadcom shares were trading up 4.3 percent to $237.01 at time of publication Friday morning.

Wells Fargo Cautious On Broadcom's Near-Term Results

The positive reaction to Broadcom's results is a function of above-consensus EPS, a 51-percent increase in dividend, its plan to drive to ratable software revenue contribution, strong Wired Infrastructure results and confidence in Wireless recovery in the second half of 2019 from lost iPhone XR content, Rakers said.

Based on the company's guidance, the analyst raised revenue and EPS estimates for FY2019 from $23.1 billion and $20.75, respectively to $24.5 billion and $23.44.

"Broadcom's customer concentration (e.g., Apple Inc. (NASDAQ: AAPL)) coupled with weak smartphone demand trends and now significant balance sheet leverage post CA acquisition leave us cautious on the company's near-term results," Rakers wrote in a note.

Broadcom Has Become A Complicated Story

Broadcom's decision not to issue quarterly guidance and break-up segment-wise semiconductor revenues make the story murkier, Caso said.

The timing for the reduced disclosure, according to the analyst, is poor and will hurt sentiment, given the macro slowdown, secular challenges in the Apple supply chain and its foray into the software business.

"But we simply can't get comfortable with numbers given all the variables and the uncertain environment, and therefore remain on the sideline," the note read.

M&A Quest Brings In Execution Risks

Broadcom will continue with its M&A binge, which also brings in execution risk as it diversifies into non-core areas, Srivastava said. Premised on higher revenue and gross margin from the CA acquisition, the analyst FY19 and FY20 EPS estimates.

MKM Views Broadcom Shares Favorably

Broadcom exited fiscal-year 2018 with 18 percent and 30 percent revenue and EPS growth, respectively, culminating in a strong finish, Roy said.

The changes to the CA business the company outlined will take time and involve executive risks. That said, Roy views the longer-term business model positively, as the management shoots for 70+ percent operating model for the business.

Strong Q4 Along, Dividend Boost Nullified Impact Of Lowered Transparency

The strong Q4 performance and the dividend boost, which earns the company the distinction of having the highest dividend in the semiconductor industry, would balance the concerns surrounding the lowered transparency, Arya said.

The analyst noted the company did not red flag any major concerns for Q1 other than the expected Apple weakness.

BofA raised its pro forma EPS estimate for 2019 by 1 percent to $23.50 and sees path to $27-$30 EPS over the next three years, which renders the current valuation of shares attractive.

Related Links:

Forecasting Software: Broadcom Looks Like It Will Keep Moving Higher

Nomura Upgrades Broadcom, Sees Dividend Hike Ahead

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