No growth means no reason to go up
Bobby Raines 10/21/2013
Now that the debt ceiling disaster has been averted and the
government reopened, investors can turn their attention back to
earnings season. Results so far have been mixed, with some big
misses like IBM, and some mixed reports that were less than
impressive like Goldman Sachs.
This week a number of semiconductor stocks, particularly those in
the mobile industry, are reporting earnings. As the market for
smartphones has matured, the outlook for stocks in this sector
has changed somewhat. It once seemed like companies making mobile
hardware could do no wrong, but that has changed as sales have
slowed. Witness the divergent fortunes of Qualcomm (
) and Broadcom (
), both companies make chips used in mobile phones, but
Qualcomm's stock is up this year while Broadcom's is not.
Most of the difference in year-to-date performance comes from
what happened after the companies reported second-quarter
earnings. Both met or exceeded analysts' estimates when adjusted
for one-time items, but Broadcom's quarterly report also included
a $501 million one-time impairment charge related to the
company's acquisition of Netlogic.
Investors generally are relatively quick to forgive a one-time
expense or two, but Broadcom's impairment came alongside an
estimate for third-quarter revenue that was below expectations.
Analysts had been forecasting third-quarter revenue between
$2.104 billion and $2.245 billion. The company provided a range
of $2.05 billion and $2.20 billion, which disappointed investors
and lead a number of analysts to downgrade the stock.
The outlook for third quarter earnings is understandably less
rosy. Analysts, on average expect the company to earn 69 cents
per share on $2.13 billion in revenue. That 69 cents is less than
the 70 cents the company reported in the June quarter and also
down from the 76 cents Broadcom reported for 2012's third
quarter. The company could exceed estimates, but is there any
reason the stock should go up if earnings aren't growing?
That lack of growth is the problem at Broadcom in a nutshell.
The company has a market-leading position in sales of chips that
combine 4G and Wi-Fi technology, but Qualcomm is making inroads
in that market and Texas Instruments (
) recently signed a contract with a large customer that is
believed to be Apple (
For a stock like Broadcom, where the company doesn't have any
real growth prospects in the near term, Consider using a
bear-call credit spread. The November 29/32 bear-call spread
currently yields a credit of about 28 cents. That's a 10.29%
return, or 150.29% on an annualized basis (for comparison
purposes only. This position will return a full profit so long as
the stock is below $29 at November expiration. That gives this
position 7.3% downside protection.
Chart courtesy of