Bull of the Day: Broadcom (AVGO)

Seems it was only a month ago I writing about Broadcom (AVGO) as the Bull of the Day and explaining why I've been strongly recommending and trading the stock since 2014 from $70.

And it's true. I did choose AVGO on December 22 when it was trading around $180. Here's how I described this powerhouse technology company in that report...

3 Key Segments

Though Broadcom is generally classified as a semiconductor designer and developer, its solutions serve telecom and enterprise networking customers in the build-out of data centers and high-speed, broadband communications. I can't say for sure if AT&T (T), Cisco (CSCO), or Alphabet (GOOGL) are customers, but I would be surprised if they weren't.

Thus about half of Broadcom's sales come from the Wired Infrastructure segment which has been seeing steady double-digit growth as these big customers transition to the 100 Gigabit Ethernet protocol.

Approximately 30% of Broadcom's revenues come from its Wireless Communications division which serves top-end mobile smart-device makers like Apple (AAPL) with radio frequency (RF) chips, amplifiers, and FBAR technology filters. Broadcom FBAR (Film Bulk Acoustic Resonator) filters are a form of bulk acoustic wave (BAW) filter that have superior performance with steeper rejection curves compared to surface acoustic wave (SAW) filters.

The third major segment at Broadcom is Enterprise Storage, which connects back with many customers from the Wired division and supplies just under 20% of revenues. The company's products enable the high-speed movement of digital data with a secure connection among multiple PCs, servers and storage devices such as hard disk drives and solid state drives.

While AVGO's Wireless business is "dependent" on Apple, that's not exactly a bad problem to have. The coming next wave of 5G technology will keep both companies rolling in sales growth.

And Broadcom's largest business, the Wired segment, is very busy meeting the demand of companies building high-speed, broadband networks, especially with the data-hogging loads of video and the storage requirements of the Internet of Things.

I Have $250... Do I Hear $300?

So what has changed in a month to make Broadcom the Bull of the Day again?

Simply this: the stock took off over 10% to new highs in the past six sessions as a couple of analysts bolstered their view of this must-own tech "arms dealer." While I've been following fund managers into AVGO for nearly 3 years, the growth story is not over.

On January 18, RBC Capital analyst Amit Daryanani reiterated his Top Pick rating on AVGO shares and raised his view of the company's long term earnings potential to $17 EPS on the heels of the acquisition of Brocade (BRCD). Here's what he had to say...

"Our analysis suggests the underlying EPS power of AVGO increases materially post BRCD (especially assuming they raise $1.5-2.0B from networking & real estate sales). We think AVGO could achieve >$17.00 of EPS by FY19 (prior $16) and the stock should work in an upside scenario to $250+."

Oddly, the analyst did not raise his existing price target from $200.

So we'll leave that to a bolder fan of the company...

On January 24, Morgan Stanley analyst Craig Hettenback raised his price target on Broadcom to $240 from $210, and obviously reiterated his Overweight rating. Here's the MS view...

"Increasing our PT to $240 from $210 and highlighting a bull case valuation of $300. Our PT is based on a 15X P/E on CY18 EPS, representing a turn increase from the current multiple but still a conservative 20% discount to the high end Semiconductor peers and 15% below the market. AVGO's multiple has been flat (100% of stock appreciation has been driven by growth in EPS) compared to a roughly 2x turn increase in semiconductor stocks, with investors unwilling to pay up for acquired growth.

"However, we now have increased conviction that clearer focus on its outperforming core business, materially higher cash returns and ongoing margin expansion will drive a re-rating over the next 6-12 months.

"The combination of Avago and Broadcom is unmatched in Networking (40% sales) in our view, which has positive implications for both growth (share gains) and profitability. We also think the company remains well positioned in RF to exploit the next growth driver of carrier aggregation, leveraging its leadership in premium filters and multiplexers."

The AVGO Campaign

And there you have an update on the continuing saga that I call "The AVGO Campaign." It tells you what works and makes you money in a bull market: finding earnings momentum winners that you know institutions will continue to buy until the cycle ends.

Consider AVGO your "playbook stock" for how to use the Zacks Rank to swing trade fundamentally-strong companies quarter after quarter.

You can find out more by following me in my TAZR Trader service.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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