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Reasons to Hold Broadcom (AVGO) in Your Portfolio for Now

Zacks Equity Research

Broadcom Limited AVGO has exhibited impressive price performance in the past year. Notably, shares of Broadcom have returned approximately 18.5% year over year, outperforming the industry’s rally of 12.5%. In the same period, the stock has outperformed S&P 500 index’s rise of 4.3%.

We note that Broadcom has delivered a positive earnings surprise of 4.3% in the trailing four quarters. Moreover, the company has a long-term expected EPS growth rate of 12.5%.

Let’s delve deeper and analyze the factors driving Broadcom’s robust quarterly performances.

Key Catalysts

Broadcom recently introduced a couple of storage area network (“SAN”)-based management software platforms, namely Brocade SANnav Global View and Brocade SANnav Management Portal. With the new offerings (now available), Broadcom attempts to simplify operations through robust data management methods which bodes well. We believe this will aid the company’s top line, going forward.

Further, the company’s strong relationships with leading OEMs across multiple target markets have helped it in gaining key insights into the requirements of customers. These insights have enhanced the company’s efficiency and productivity in serving the target markets and customers better.

Broadcom’s expanding product portfolio makes it well poised to address the needs of rapidly growing technologies like Internet of Things (IoT) and 5G.

We believe that the company’s extensive product portfolio is likely to positively impact the to-be-reported quarter’s results.

Furthermore, we believe that the company is well positioned to benefit from synergies from the CA buyout. In fact, CA’s strength in enterprise software offerings and substantial customer base is anticipated to enable Broadcom to explore the infrastructure software market and expand its TAM.

Q1 Results

Broadcom reported first-quarter fiscal 2019 non-GAAP earnings of $5.55 per share, which beat the Zacks Consensus Estimate of $5.19. The figure improved 8.4% from the year-ago quarter.

Non-GAAP revenues from continuing operations were $5.789 billion, up 8.7% from the year-ago quarter and 6.3% sequentially.

Broadcom generates significant cash flow that enables it to pay consistent dividend. During the first quarter, the company repurchased approximately 14.2 million shares for $3.51 billion. Additionally, Broadcom returned $1.1 billion in forms of dividends to shareholders during the fiscal first quarter. The company also approved a quarterly cash dividend of $2.65 per ordinary share. The dividend payout appears sustainable backed by strong and relatively stable cash flow, which in turn makes the stock quite attractive.

Risks Persist

However, decline in its large wireless customers and sluggish spending on video access in the China optical markets remain concerns.The company faces intensifying competition and integration risks owing to frequent acquisitions. The company’s leveraged balance sheet and customer concentration continue to be headwinds.

Our Take

We expect the aforementioned factors to aid the company sustain strong momentum and stay afloat amid difficult times. Consequently, we suggest that investors retain the stock for the time being.

Zacks Rank and Stocks to Consider

Currently, Broadcom carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Cadence Design Systems, Inc CDNS, Synopsys, Inc. SNPS and Symantec Corporation SYMC, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cadence Design, Synopsys and Symantec have long-term earnings growth rates of 12%, 10% and 7.9%, respectively.

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