Uncertainty Remains, but AVGO Stock Is a Buy at These Levels

Down around 30% since the market sell-off, is Broadcom (NASDAQ:AVGO) stock a buy? We aren’t out of the woods just yet with the coronavirus. This week’s market rebound could be just a dead cat bounce. But, AVGO stock could be a solid way to play a possible market rebound.

Uncertainty Remains, but AVGO Stock Is a Buy at These Levels

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Broadcom has strong cash flow generation and a high dividend yield that appears sustainable coupled with a reasonable valuation. It really looks as if the semiconductor and software giant could be a buy at today’s prices. Concerns about growth remain, but compared to other names in the space, Broadcom offers a nice risk-reward proposition.

Let’s dive in, and see what’s the play with Broadcom going forward.

AVGO Stock and COVID-19

How does the coronavirus impact results for Broadcom? While it remains to be seen whether the pandemic means big sales declines, recent results give us a glimpse of what’s in the cards.

 

On March 12, Broadcom released results for its fiscal first quarter 2020 (ending January 2020). Results fell short of analyst consensus. Sales of $5.86 billion were below Wall Street’s estimate of $6 billion. EPS (earnings per share) also disappointed, coming in $5.25 per share, versus projections of $5.33 per share.

The important thing to note is that these results do not include many COVID-19 issues. The virus’s economic impact was just starting during this fiscal quarter. The company has withdrawn its fiscal 2020 guidance but provided an update for the upcoming second quarter (ending April 2020).

Guidance calls for $5.7 billion in sales. That’s well below Wall Street’s $5.94 billion projection. Yet, this sales dip seems minor. Considering that smartphone shipments from China dipped considerably post-outbreak. As a major Apple (NASDAQ:AAPL) supplier, this remain a big risk for the quarters ahead.

Yet, analysts remain confident in Broadcom’s future upside, with 68% leveling “buy” ratings or equivalent on the stock. This includes Bernstein’s Stacy Rasgon. While Rasgon remains “nervous on semis overall,” he sees the company’s “risk-reward becoming considerably more favorable.”

I agree with this take. Especially when considering the stock’s valuation and dividend positives. Compared to its peers, AVGO stock offers a compelling proposition.

Reasonable Valuation, Sustainable Dividend

Future operating performance may be a question mark. But consider Broadcom’s many positives. Firstly, a reasonable valuation. Although multiples have been contrarian, shares are cheap considering the valuations of its closest peers.

AVGO stock currently trades at a forward non-GAAP price-to-earnings (P/E) ratio of 9.7. That’s far below Qualcomm’s (NASDAQ:QCOM) forward multiple of 15.6. NXP Semiconductors (NASDAQ:NXPI) also trades at a higher forward P/E (11.4). With this in mind, it’s apparent why analysts remain bullish on shares.

Also in play is a high dividend yield with minimal risk of a cut. Broadcom shares currently sport a dividend yield of 6.1%. That’s far above Qualcomm’s 3.8% yield, or NXP’s 1.8% yield. I know what you’re thinking; is this stock’s high yield sustainable? At a time where dividend cuts are top of mind, it’s a valid consideration.

But, as this Seeking Alpha contributor recently discussed, Broadcom’s high gross margins could protect the dividend. Also, investors should consider the company’s recent diversification. With acquisitions of CA Technologies and Symantec’s enterprise business, software now makes up around 30% of sales.

Granted, AVGO stock remains tied to the semiconductor market, but this diversification could mean less volatile earnings. This may mean further support for the dividend.

In short, Broadcom may not be the “hottest stock.” But on valuation and dividend yield alone, shares appear to be a screaming buy. Investors may start to take a second look, moving shares higher than current levels.

The Bottom Line on AVGO Stock

It remains to see whether the recent Stimulus Package helps the market regain more ground after the COVID-19 sell-off. But, compared to other chip-makers, Broadcom offers a solid opportunity. In terms of valuation, shares appear cheap relative to peers. In terms of dividend, the company’s high, and likely sustainable yield, could be attractive to income investors.

Future growth remains up in the air. Recent guidance cuts could mean that results fall short in both FY20 and FY21. Yet, given the stock’s massive drop in recent weeks, just a crumb of positive development could send it back towards prior price levels.

What’s the call? Buy AVGO stock, at today’s reasonable prices. Even if shares fall short of retracing their highwater mark, investors could see material near-term upside.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/buy-avgo-stock-at-these-levels/.

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