The Ratings Game: Broadcom shares pare gain seen as strong quarter, analyst price hikes soothe Apple concerns

Broadcom Ltd. shares traded between gains and slight losses Thursday, retreating from an initial climb after a majority of analysts hiked price targets on the chipmaker’s strong earnings and outlook, softening concerns that iPhone production snags would hamper sales growth of wireless components.

Late Wednesday, Broadcom AVGO, +0.00% topped Wall Street estimates for the quarter and issued a revenue outlook well above the consensus. The company also said it was raising its “interim” quarterly dividend by 72% to $1.75 a share.

Broadcom shares, which traded up as much as 4.5% earlier in Thursday’s trading session, slipped 0.2% to $263.48 in afternoon trading. Shares are up 49% for the year, compared with the 37% gain in the PHLX Semiconductor Index SOX, +0.99%  and the 18% gain in the S&P 500 index SPX, +0.29%

The company reported adjusted fiscal fourth-quarter earnings of $4.59 a share on revenue of $4.84 billion. Analysts surveyed by FactSet had estimated earnings of $4.52 a share on revenue of $4.83 billion, while Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, was looking for earnings of $4.58 a share on revenue of $4.84 billion.

For the fiscal first quarter, Broadcom estimated revenue of $5.22 billion to $5.37 billion, while analysts had forecast revenue of $4.83 billion before the earnings report. The outlook was helped by the addition of the acquisition of Brocade Communications Systems Inc., which closed in November. Analysts now see a consensus of $5.25 billion.

Following earnings, 20 analysts hiked their price targets on the stock to an average $314.26, up 4% from $301.58 ahead of earnings. Prior to that, 15 analysts hiked their price target on the stock over the course of November.

By product segment, Broadcom reported a 33% in wireless communication revenue to $1.8 billion versus the $1.75 billion expected by analysts. Broadcom is a major supplier for Apple Inc.’s AAPL, +0.18%  iPhone X, which uses a wireless charging controller, a touch-screen controller and a power amplifier module from Broadcom. On the whole, analysts appear confident that Apple sales will continue to be a driver.

The company also reported a 15% gain in enterprise storage revenue to $645 million, below the $667.9 million consensus, and a 66% increase in industrial and automotive revenue to $257 million versus the $246.6 million consensus.

Of the 29 analysts who cover Broadcom, 28 have buy or overweight ratings while Morningstar Equity Research has the single hold rating, according to FactSet. While Broadcom didn’t provide any details on what is becoming an increasingly hostile bid to take over Qualcomm Inc. QCOM, +0.38% analysts were pleased on the whole.

RBC Capital Markets analyst Amit Daryanani, who has a buy rating on the stock and raised his price target to $325 from $315, said Broadcom “remains and attractive stock with or without” Qualcomm.

“AVGO reported another impressive quarter and provided a robust outlook for Jan-qtr, which given rampant AAPL production concerns is impressive — despite majority of upside to guide driven by extra week and [Brocade] contribution,” Daryanani said.

Oppenheimer analyst Rick Schafer, who raised his price target to $315 from $300, said Broadcom has a sustained competitive and manufacturing advantage. He noted:

Mgmt continues to execute on virtuous cycle of capital returns and margin/[free cash flow] accretive M&A, with organic rev. growth above 5% long-term target as icing on the cake.

Susquehanna Financial Group analyst Christopher Rolland, with a $325 price target, said accelerating revenue in AI and Deep Learning application and next-generation iPhone components are highly significant to the company. He noted:

We believe iPhone X production woes abated during the quarter driving better guidance. Comments about A.I. and increased RF content in 2018 iPhones could help re-rate the multiple higher. Remains the must-own large cap in semis, in our opinion.

Raymond James analyst Chris Caso, with a $335 price target, had this to say:

Looking forward, we are taking a more cautious approach to April given the absence of the extra week and uncertainty regarding Apple shipments after the strong January.

Instinet analyst Romit Shah, who hiked his price target to $330 from $300, said he saw several positives from Broadcom’s earnings and noted:

While we acknowledge that Broadcom is one of the more levered names within our coverage, we believe the stock should trade at a premium to its mixed signal/analog comp group average of 17.8x to account for the potential upside should the [Qualcomm] acquisition occur.

BMO Capital Markets analyst Ambrish Srivastava, who has a $330 price target and believes $410 to $450 is in range if Qualcomm is acquired, said:

The 72% increase in dividend is a sign of confidence in the sustainability of its business model, in our view. Additionally, while comments on the proposed Qualcomm acquisition were minimal, we also walked away feeling the company’s confidence in succeeding with its bid is high.

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