Semiconductor firm Broadcom (BRCM) has had it rough this year. BRCM has taken a hit to its bottom line as an uptick in smartphone volume has pressured prices for the company’s chips. The outlook was so bad last quarter that Broadcom was forced to cut its third-quarter earnings estimates for this year, along with estimates for next year.
Broadcom does have a chance to change BRCM stock investor perceptions later this afternoon, though, when Q3 Broadcom earnings are actually released.
Overall, Wall Street is anticipating BRCM earnings to fall 13% year-over-year to 69 cents per share. Broadcom revenue is expected to be flat at $2.13 billion. There isn’t much to drive these numbers much higher, as BRCM has lost quite a few low-cost smartphone sockets to Qualcomm (QCOM) in recent months.
However, BRCM connectivity chips and touchscreen controllers are being used in the recently released Apple (AAPL) iPhone 5S. As such, some analysts have set their sights higher for Q3 Broadcom earnings. EarningsWhisper.com says the BRCM earnings whisper number is 72 cents per share — 3 cents higher than the consensus.
There is also a wealth of bullish sentiment in the brokerage community for Broadcom, with BRCM stock attracting 29 “buy” ratings, 15 “holds,” and no “sell” ratings. The consensus 12-month price target for BRCM stock of $32.66 has room to grow, however, representing a premium of only about 20% to the close price of $27.32 for BRCM stock on Monday.
Activity in the options pits also points toward a heavy dose of optimism for BRCM. Specifically, call open interest in the October/November series has ballooned to more than 120,000 contracts, compared to put open interest of only 47,242 contracts. The result is a put/call open interest ratio of 0.39 for BRCM, with calls nearly doubling puts among near-term options.
Options bulls appear to be heavily focused on out-of-the-money strikes. The just overhead Nov. 30 and deep-out-of-the-money Nov. 38 strikes have taken top honors as home to peak open interest, sporting 32,851 contracts and 12,194 contracts, respectively. Peak put open interest for BRCM stock, meanwhile, resides at the out-of-the-money Nov. 25 strike, totaling 6,618 contracts.
Overall, weekly October implieds are pricing in a potential post-earnings move of about 5.3% for Broadcom. This places the upper bound of an expected BRCM move near $28.78, while the lower bound lies near $25.86.
Technically, last quarter’s lowered guidance pounded BRCM stock lower, taking shares from a trading range in the $35 region to its current perch just north of $25. Broadcom stock has shown some resilience lately, however, rallying back above its 10-, 20-, and 50-day moving averages.
In fact, should BRCM stock break above resistance in the $28 region, the next potential sticking point doesn’t emerge until the $31 area.
Given last quarter’s pummeling, BRCM stock has some ground to make up. Wall Street appears to have already priced in a poor performance for this quarter, and any positive news or improved outlook should bode well for BRCM. As such, it appears that recent call activity might be smart money heading into the company’s quarterly report.
Traders looking to jump on the bullish bandwagon might want to consider a Nov. 27/31 bull call spread. As of the close on Monday, this spread was offered at $1.12, or $112 per pair of contracts. Breakeven lies at $28.12, while a maximum profit of $2.88, or $288 per pair of contracts, is possible if BRCM stock closes at or above $31 when November options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.