Broadcom Corporation (BRCM) — This company makes semiconductors for broadband communications markets such as cable set-top boxes, modems, and office and home networks. It was announced in May that Broadcom would be acquired by Avago Technologies Ltd (AVGO) for $37 billion. This deal will create the world’s leading diversified communications semiconductor company.
S&P Capital IQ Equity Research has a “strong buy” rating on BRCM stock due primarily to growth opportunities and synergies from the pending acquisition, as well as higher profitability from a leaner business model following a reorganization. Its analysts also see growth in smartphones, tablets and automobiles, as well as increased traffic in major data centers, benefiting the company’s top and bottom lines.
Capital IQ expects revenues to come in flat for 2015, but increase 3.8% this year. Margins are expected to be near 55% for both years. On the earnings front, its analysts estimate operating earnings of $2.80 per share in 2015 and $2.98 in 2016. Their price target of $62 is based on a P/E multiple of 20.8 times 2016 estimated EPS.
Following a jump from $47 to $57 in May on news of the deal with Avago, BRCM stock consolidated in a huge “V” formation with support at about $51.50, approximately the 50-day moving average, and resistance at a double-top at about $58.
Several high volume up days indicate there may be a large buyer despite institutional ownership of 88%. Vanguard is currently the largest holder with 5.5% of shares outstanding.
Buy BRCM stock at $52 with a trading objective of $62 within six months for a potential return of about 20%, including dividends. Entering a stop-loss order at $48 may be a wise move.
