, until fairly recently, had been a company with a story centered
around its potential as the next big mobile chip competitor.
Given that, according to
the smartphone applications market was worth about $18
billion in 2013 , it's not hard to see why Broadcom -- which
reported approximately $8.2 billion in mostly non-mobile
applications processor sales over that same period -- and its
investors were excited about this opportunity.
That said, following Broadcom's divestiture of its cellular
chip business, it has become a less headline-worthy stock as its
focus on products such as connectivity combo chips, network
processors, and set-top box chips that just don't quite drum up
the excitement that a "2GHz Octa-Core 64-bit processor" does.
Paradoxically, now that Broadcom is out of cellular, its
business has become significantly more attractive. Even after a
sharp rise in its stock year-to-date, Broadcom may be one of the
few compelling tech value plays left on the market.
Bridging the gap between GAAP and non-GAAP
A quick glance at Broadcom's GAAP price-to-earnings ratio shows a
stock that could potentially be expensive at just south of 35
times earnings. However, this number is misleading as the company
has taken numerous restructuring and impairments over the last
several quarters that have masked its true earnings power.
For example, adding up the company's GAAP operating income
over the last four quarters works out to about $706 million.
However, looking at non-GAAP (which excludes these one-time items
as well as share based compensation), the company raked in $1.61
billion in operating income.
Getting a better approximation of current earnings power
Now, there are a couple of things to consider here. First, since
share-based compensation comes out of the pockets of shareholders
(though via dilution rather than cash expense), it's a good idea
to strip out both one-off charges as well as share-based
Further, given that Broadcom has officially announced that it
is winding down its cellular business and that this would save
approximately $600 million in research and development expense
(along with an additional $100 million in stock-based
compensation), investors should add this back to operating
The math in trying to figure out the "true" operating profit
over the last four quarters works out to about $1.77 billion in
operating profit. To be clear, this is non-GAAP operating profit,
less share-based expense, but with $650 million added back from
the divestiture of cellular (the total savings from this
divestiture, according to Broadcom, is $700 million, but
management did indicate that it would be allocating $50 million
of those savings to its other business units).
One last thing to consider
A final point to consider is that Broadcom estimates that, over
time, approximately $500 million-$800 million of its connectivity
business is at risk as a result of its divestiture of cellular.
This is, according to the company, due to the fact that the
low-end and mid-range of the smartphone connectivity market
necessitates that a chip vendor have the entire platform
(including cellular) in order to secure a win.
For the sake of conservatism, let's assume that this business
is worth $800 million at approximately 17% operating margin
(which Broadcom has suggested was its mobile operating margins
excluding the heavy cellular investment). Doing so yields
operating profit of $136 million, which should be removed from
this conservative estimate of Broadcom's operating profit
All told, this gives a baseline of $1.63 billion of operating
profit to work with.
Thinking about the growth and valuing the stock
Broadcom has indicated that its combined Infrastructure and
Broadband segments together have seen a 9% revenue and 12%
operating profit compounded annual growth rates, respectively
The trickiest part is trying to figure out the growth profile
of the company's connectivity business, but after the revenue
"reset" related to the potential loss of the low-end and
mid-range connectivity business, it is probably safe to expect
growth slightly above that of the high end smartphone market
(perhaps mid-to-high single digit revenue growth).
How do the numbers work out then? Well, the S&P 500
commands a multiple of 19.61 as of this writing, so even playing
it safe and assuming a sub-market multiple range of 15-17 times
earnings, and assuming that Broadcom can keep its tax rate
in-line with historically low levels (according to a piece in the
, Broadcom's median tax rate between 2005 and 2010 was 2.8%), the
stock could be worth $44 -$50, representing anywhere from
Foolish bottom line
Though much of the upside has been captured in the move from
about $23 per share last year to today's approximately $39 per
share, the stock still appears to offer fairly compelling upside
potential even in light of some very conservative assumptions and
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Is It Time to Buy Broadcom Corporation's
originally appeared on Fool.com.
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