Broadcom Still A Top Pick Among Analysts Despite Blocked Merger

Broadcom Ltd AVGO's pursuit of QUALCOMM, Inc. QCOM has come to an end after President Donald Trump blocked the deal. While Singapore-based Broadcom is free to pursue acquisitions of other U.S.-based companies, Wall Street analysts are now resuming coverage of the stock under the assumption it will remain a standalone company in the near-term.

The Analysts

• Bank of America's Vivek Arya resumed coverage of Broadcom's stock with a Buy rating and $340 price target.
• Deutsche Bank's Ross Seymore resumed coverage of Broadcom's stock with a Buy rating and $325 price target.

Arya: Multiple Positive Attributes

BofA's bullish investment thesis for Broadcom is based on a plethora of factors, Arya said in a research report. They include:

• A diversified product portfolio across mobile broadband, cloud switching, enterprise storage and AI chips.
• A sector-leading 2.8-percent dividend yield and an attractive valuation of 16x on CY2018E P/E with the potential to move higher to 20x.
• A sustainable long-term organic sales outlook of 6-to-8 percent.
• An industry-leading operating margin of 48.9 percent, with a path to move above 50 percent over the next six to eight quarters.
• The potential for best-in-class 40 percent free cash flow.
• The stock is still trading at a 20-percent discount to peers.

Seymore: Focus On Free Cash Flow

Broadcom's pursuit of Qualcomm ended in "disappointment," but the company can now resume its prior strategy of allocating its free cash flow between dividends and M&A deals, Seymore said in a research report.

It wouldn't be a surprise if the company increases its mix toward dividends, and cash returns will become an "increasingly dominant metric on which the company is valued," the analyst said. 

Related Links:

Trump Blocks Broadcom-Qualcomm Deal Citing National Security Concerns

Why Broadcom Is A Favorite At Bernstein, With Or Without Qualcomm