Broadcom Price Resets After Earnings Beat
Shares of Broadcom (NASDAQ:AVGO) took a hit in the after-hours market following the release of its earnings report. Once again what we have is a case of when really good is not good enough. The problem is one we’ve been seeing across the market and is not limited to any one sector. As with Broadcom, in most cases, this is leading the market lower now but setting it up for the next bull run. Considering the underlying strength in the semiconductor market this company is more than well-positioned for the coming year, the only question is when will be the right time to buy more?
Broadcom Beats And Raises But Not Enough
Broadcom is suffering the same malaise that has led the shares of a host of top-tier companies lower over the past week. The company reported a stellar quarter, it beat the consensus targets, and it raised guidance with one problem. The market sentiment was so bullish it was expecting better-than-consensus results so what we got was really just what the market wanted. It’s esoteric I know but that’s how the market works. So, the $6.66 billion in consolidated revenue is up 13.7% from last year and beat by $0.04 billion or about 60 bps, a slim margin in today’s market. Specialty chip-maker Ambarella (NASDAQ:AMBA) beat by 770 basis points and its shares fell, to give the results some perspective.
Within the results, the company saw the most strength in the semiconductor solutions segment and that is no surprise. While many end-users are ramping production the story in semis is more about volume than an expansion within the industry, although that is happening too. Infrastructure Software, the lesser of the company’s two operating segments, grew a much smaller 5% but posted growth nonetheless.
Moving down the report, the company’s margins widened along with the ramp in volume. The leverage to earrings resulted in a 23% gain in operating profit and a 35% increase in FCF. FCF, notably, came in at 96% of the total earnings and is very available for shareholder returns. On the bottom line, the adjusted and GAAP EPS were both strong as well, and both beat the consensus, but once again by small margins. The $6.61 in adjusted EPS only beat by $0.04 while GAAP eps beat by $0.15.
Broadcom issued favorable guidance and more than enough reason to think share prices will rebound in the future. The problem is that, once again, the $6.5 billion in forecasted revenue is only slightly above the $6.35 billion in consensus revenue and not enough to trigger new investment. The takeaway for us is that this excellent company, this FCF machine that trades a discount to the broad market, is now trading at an even more attractive price.
The Broadcom Dividend, Safe And Growing
Broadcom is a decent dividend payer with a 3.11% yield and a relatively high amount of safety. The payout ratio is a mere 55% of earnings with ample free cash flow and only the debt to worry about. The company is carrying some debt but cash is high, leverage low, and coverage is adequate so we do expect a 10th distribution increase in the first quarter of next year.
The Technical Outlook: Broadcom In Correction
Shares of Broadcom are already down roughly 10% from the recent high and in danger of making a deeper correction The shares are testing support in the premarket session and may breakthrough after the open. A breakthrough at the $442 level would be bearish and could take the stock down another 5% or 10% over the next few weeks. Longer-term, this company is growing and so are its share prices. Any pullback we see over the next few weeks will be a buying opportunity.
Featured Article: How does new data get added to a blockchain?7 Stocks It May Be Time To Take Profits On
Should you or shouldn’t you? Many investors are wondering if it’s time to take some profit. With so much uncertainty in the market, there can be a temptation to take your profits and run. That may or may not be a good strategy. It’s true there are some speculative stocks that are going up on nothing but faith, trust, and pixie dust. But there are other stocks that may still be good buys despite continuing to grow.
Since the sell-off caused by the novel coronavirus and subsequent locking down of large portions of the economy, the stock market has recovered nearly all of its losses. The Federal Reserve has done its part by pledging to keep interest rates low for as long as it takes. New housing starts are up. Unemployment is coming down. There seems to be a lot of fuel for market bulls.
Still, if you’ve been holding one of the stocks in this presentation, it may be time for you to take some of the profits you’ve made. Many of the stocks in this presentation are being downgraded by analysts. And that means that there is likely to be downward pressure on the stock price.
View the "7 Stocks It May Be Time To Take Profits On"
Companies Mentioned in This Article
Compare These Stocks
Add These Stocks to My Watchlist