What Wall Street Thinks Of Broadcom's Q2 Earnings

The Street’s been bullish on Broadcom Inc AVGO over the past month, and the quarter’s adjusted bottom-line and top-line beats only strengthened their conviction.

Charter Equity, Bernstein, Credit Suisse and Jefferies raised their estimates on the company following Thursday's earnings release.

What The Analysts Said

Charter analyst Edward Snyder saw no disappointments in the earnings report, but was positively surprised by the 12-cent upside driven by a wired-over-wireless mix elevating gross margins.

Bernstein reacted similarly.

“Outside of wireless, things seem to be going swimmingly,” analyst Stacy Rasgon wrote, referencing an inflection in wired and storage segments, record margins and strong cash return.

Guidance For Growth

Broadcom guided for earnings per share above estimates on higher gross margins, lower operating expenses and lower taxes.

“Looking forward, we model capex intensity of 2 percent and stable opex, which we expect will result in continued FCF growth, and translate to higher quality of earnings and increased capital returns,” Jefferies analyst Mark Lipacis wrote in a note.

Lipacis also expects a price-to-earnings expansion as Broadcom completes its $12 billion buyback program. The corresponding share-count reduction, coupled with a potential $5 billion to $10 billion deal and “likely” dividend increase, fostered hope of upside in Rasgon.

Credit Suisse anticipates a 30-percent dividend raise from $1.75 to $2.25 in October, while Morgan Stanley forecasts a delay in the rise to December.

Additionally, Morgan Stanley foresees sector “choppiness” and an improved second-half driving incremental value in the stock.

Where Wireless Is Heading

Bernstein expects the firm’s wireless market share to fall to mid- to high-single digits in 2019 but suspects the segment is generally derisked through the next year.

Such a drop, though, may not be so detrimental.

“Customer concentration could lead to slower growth in Wireless, but Wired, Storage, and Industrial will continue to surpass long-term targets,” Snyder wrote. “All the hand-wringing questions about wireless growth for the October quarter obscured the reality that over the next three years, all OEMs will have to spend more on BAW filters to field 5G compatible handsets.”

Morgan Stanley offered similar analysis.

“With a bottom in wireless in place and momentum building in data center and parts of storage, the stock won't stay this cheap,” its analysts wrote.

Global Circumstances

Morgan Stanley noted the smartphone environment could drive volatility, although Charter “has little doubt” Broadcom will capture expensive RF front-end opportunities for pre-5G devices with Apple Inc. AAPL and Samsung.

However, China’s movement in the 5G space could affect OEM production and thereby Broadcom revenue.

“So, while we agree with management's view of long-term RF content growth, we believe the deceleration in demand in Apple's phone business over the last three cycles could stretch that growth over longer product cycles, compelling Broadcom to move more of its resources to connectivity, touch and custom ASIC products,” Snyder wrote.

Nonetheless, he expects no near-term impact considering 2018 opportunities in the wired and storage segments.

“Between that growth and robust free cash flow, we expect top line and margin growth to continue outstripping long-term targets and expect another big step up in cash return to shareholders before year end,” Snyder wrote.

The Ratings

Bernstein maintained an Outperform rating and raised its target from $310 to $320;
Charter maintained a Buy rating;
Credit Suisse maintained an Outperform rating with a $335 target;
Jefferies maintained a Buy rating and raised its target from $319 to $326; and
Morgan Stanley maintained an Overweight rating with a $320 target.

The stock closed Friday at $257.97.

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Image credit: Floirian Knodt, Flickr

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