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Bull of the Day: Broadcom (AVGO)

Ryan McQueeney

The recent dominance of the tech sector—and more specifically, the semiconductor industry—cannot be understated. As we head into 2018, investors will want to be focusing on the strongest tech stocks possible. Luckily, semiconductor giant Broadcom Limited (AVGO) has emerged as a strong candidate for a New Year surge.

Broadcom Limited is one of the largest semiconductor manufacturing firms in the world. The company is co-headquartered in San Jose and Singapore and was formed through the merger of Avago and Broadcom Corporation last year. The chipmaker specializes in wired infrastructure, wireless communications, enterprise storage, and industrial solutions.

After reporting another impressive quarter, Broadcom has witnessed several positive earnings estimate revisions and is now sporting a Zacks Rank #1 (Strong Buy).

Latest Earnings Report

Broadcom reported its fourth-quarter fiscal 2017 results on December 6. The company posted earnings of $4.59 per share, beating the Zacks Consensus Estimate of nine cents and improving 32.2% year-over-year. Non-GAAP revenues from continuing operations of $4.85 billion were also above our consensus estimate and 16.9% higher than the year-ago quarter.

Revenues from the company’s Wired Infrastructure unit, which accounts for 44.3% of total revenues, improved about 3.5% year-over-year. Sales in the company’s Wireless Communications unit (37% of total revenues) gained 33.4%, while revenues in the Enterprise Storage segment (13% of total revenues) increased 15%.

The company was also able to improve efficiency. Gross margin expanded 250 basis points from the year-ago period, while operating expenses declined roughly 3.5%. Broadcom also approved a quarterly dividend of $1.75 per share, which was up 72% year-over-year.

Based on these strong results, management improved its long-term target operating model. The company is still looking for annual revenue growth of 5%, but non-GAAP gross margin is now expected at 65%, up from the previously-announced outlook of 60%.

Earnings Estimates and Key Stats

Earnings estimates are moving higher in the wake of Broadcom’s strong report. In fact, the Zacks Consensus Estimate for the company’s current quarter has gained 20 cents over the past week, while our consensus estimate for its full-year earnings as improved by 43 cents in that time.

Looking further ahead, the Zacks Consensus Estimate for Broadcom’s next fiscal year has gained a staggering 59 cents over the past seven days.

Broadcom currently has an “A” in the Growth category of our Style Scores system. We expect to see the company report earnings growth of 19% and sales growth of 17% in the current fiscal year. The firm is also growing its cash flow at a rate of 57%, so it is clearly improving its financial position.

The stock is also displaying impressive valuation metrics, including a P/E ratio of 13.59, which is significantly lower than the “Semiconductor” industry’s average of 20.42. AVGO also has a PEG ratio of just 0.99, so investors are getting a solid price for the firm’s earnings growth right now.

It is obvious that Broadcom’s latest quarterly performance, as well as its short-term outlook and overall fundamental stability, makes it stick out right now.

Want more stock market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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