Reports Q1 2019 results on Thursday, March 14 after closing of the market
Income expectation: $ 5.83 billion
EPS expectation: $ 5.23
It is not a good time to become bullish about the semiconductor industry. The demand for chips used in smartphones, game hardware and cryptocurrencies has dried up and investors have dumped shares of some of the largest producers, including former high-flyers Nvidia (NASDAQ 🙂 and Advanced Micro Devices (NASDAQ :).
In this uncertain environment, the first quarter earnings from Broadcom (NASDAQ :), the last major chip maker reported in the current earnings cycle, are likely to provide some fresh air. A factor that helps Broadcom, based in San Jose, California, is the better product mix and lower operating costs.
Chipmakers got a big shock in January when Apple (NASDAQ 🙂 shortened the iPhone sales forecast for 2019 in early January, citing a sharp slowdown in China. That bleak prediction of the world's largest smartphone maker also clouded the future of many chip makers who supply many parts to the mobile phone industry.
But Broadcom seems to be in a good position to weather this decline after the $ 19 billion acquisition of CA Technologies last year. The deal, which the market initially did not like, separates Broadcom from the rest of the crowd and offers the revenue base with a nice diversification.
The shares, which closed at $ 269.63 yesterday, rose by 16% in the last six months, better than the, which won only 9% in the same period. According to Broadcom's Chief Executive, Hock Tan, after the acquisition of CA, the company is in a better position than any of its competitors to endure a delay.
Broadcom weekly chart
CA's customer base includes "virtually all of the world's largest companies," he adds, while these companies spend billions on their IT infrastructure, giving Broadcom new opportunities to sell its chip products.
According to a bank note from Merrill Lynch, quoted by Bloomberg in January, the Broadcom dependence on Apple has shrunk to around 15-20%, less than 25%. Analysts led by Vivek Arya wrote that more than 80% of Broadcom's revenue is now derived from "more stable, sustainable business, cloud, network, software [and] storage segments."
Investors will find proof of this strength tomorrow morning when Broadcom reports earnings for the first quarter. On average, analysts expect Broadcom to report $ 5.23 earnings per share, an increase from $ 5.12 a year ago. Turnover is likely to increase by 9% to $ 5.83 billion.
For the full year, Broadcom is expected to report adjusted earnings per share of $ 23.04, against an estimate of approximately $ 21.50 in October and an actual profit of $ 20.82 in the year 2018.
After the sales pressure had fallen that tumbled the stock prices of many top chip makers in 2018, Broadcom has proven that the business model is much stronger and that the company is better positioned to cope with this decline.
Bottom Line
With the price-earnings multiplier of just over 10 and with an annual dividend yield of around 4%, we see Broadcom as a much better bet for long-term investors who want some exposure in the semiconductor industry. . This share may underperform in 2019 because many of its competitors are returning from floor prices, but Broadcom offers a better risk / return proposition for the buy-and-hold investors after the acquisition of CA.
