Thursday, September 15, 2011

Broadcom Can Accelerate Your Net Worth

Chip maker, Broadcom (NASDAQ: BRCM), is near the top of Fortune's list of big fastest-growing companies -- and is its 84th fastest growing company. Does that mean you should own its shares?

Broadcom recently announced a big networking chip maker for which it paid a big premium. The new addition is mobile network chip-maker, Netlogic Microsystems. At for $3.7 billion, the deal is Broadcom's biggest and is priced 39% above its market value. Fortune reports that analysts agree that Broadcom should expand in this market.

Is Broadcom's strategic expansion a good enough reason to buy its stock? Here are three reasons to consider it:
  • Low valuation. Broadcom trades at a Price-Earnings-to-Growth ratio of 0.68 — a P/E of 19.5 on earnings forecast to grow 28.6% to $2.31 in 2012.
  • Great earnings reports. Broadcom has been able meet or beat analysts' expectations in all of its past five earnings reports.
  • Higher sales and profits and decent balance sheet. Broadcom sales have grown at a 16.4% annual rate over the last five years from $3.7 billion (2006) to $6.8 billion (2010) and its net income has increased at a 30.5% annual rate from $379 million (2006) to $1.1 billion (2010) -- yielding a solid 16% net margin. Its debt has risen -- but its cash remains solid. Specifically, its long term debt was $698 million in 2010 after previously being debt-free while its cash was unchanged over the five years at $2.7 billion.
One negative:
  • Out-earning its cost of capital but getting worse. Broadcom is earning more than its cost of capital – but it’s falling behind. How so? It’s producing negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Broadcom's EVA momentum was -3%, based on six months annualized 2010 revenue of $6.1 billion, and EVA that fell from six month annualized 2010's $222 million to six months annualized 2011's $60 million, using an 11% weighted average cost of capital.
It looks to me like the positives for Broadcom, outweigh its negative EVA momentum. If its 2012 EPS forecast is right, this fast-growing company is trading at a cheap price.


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