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Broadcom stock (AVGO) climbed 5.4% in the first 10 days of September, ahead of its third quarter results in fiscal 2019. The company plans to release its results today. after the market closed. The stock soared while the trade war between the United States and China showed signs of easing. This evolution had a positive impact on the stock market.
So far this month, VanEck Vectors Semiconductor (SMH) ETFs and SPDR S & P 500 ETFs (SPY) grew by 6.4% and 3% respectively. Broadcom shares also benefited from the release of the Apple iPhone 11 (AAPL) models, which use several Broadcom components.
As Broadcom is a large cap offering high analyst coverage, its price reflects recent changes in the company's outlook. The stock underperformed the sector, the market, peers and clients.
Broadcom shares have grown 17.5% since the beginning of the year (SPY, SMH, Qualcomm, Symantec (SYMC), Texas Instruments and Apple). Broadcom's strong fundamentals led to its strong leverage and the escalation of the trade war in China limited its potential.
Broadcom's strength lies in its strong fundamentals
Broadcom is growing steadily because of its strong fundamentals and successful mergers and acquisitions (or M & A). The company's CEO, Hock Tan, operates the company as a private equity fund, as it acquires troubled companies that are market leaders and have high cash flows.
Tan restructures these companies by selling non-core assets and strengthening its core business. Broadcom has restructured CA Technologies' business model from a perpetual license model to a fully-available subscription model that can be renewed at specific intervals.
Broadcom's M & A strategy has allowed it to consistently grow revenues, margins and cash flow. These events took place over the last five years (from fiscal year 2015 to fiscal year 2019):
- The company's revenues went from $ 7 billion to $ 22.5 billion.
- Operating margin increased from 42.9% to 51%.
- The company's operating cash flow increased from $ 2.3 billion to $ 10.5 billion.
- Its dividend has risen from 0.40 USD to 2.65 USD.
The above growth is reflected in Broadcom's share price, which increased from $ 85 in October 2014 to $ 298 currently. The company's historical data shows that the stock generates strong returns for investors through a long-term dividend and capital appreciation.
Broadcom's weakness is its strong leverage
The strong growth of Broadcom through acquisitions has a price: its massive debt. The company's balance sheet is highly leveraged with long-term debt of $ 37.5 billion and cash reserves of $ 5.3 billion until May 3. This high debt results from its acquisitions of billions of dollars over the last five years.
Tom Krause, chief financial officer of Broadcom, said: "We remain focused on achieving a total of $ 8 billion in share buybacks and stock eliminations over the course of the year. FY 2019. Enterprise Security for $ 10.7 billion in August Broadcom plans to fund this acquisition with additional debt, raising its leverage ratio to dangerously high levels.
Broadcom's current leverage ratio was 3.2, which is above Moody's preferred ratio of 3.0. The last time the chip maker's debt ratio crossed the 3.0 mark was in fiscal 2014.
At that time, the company terminated its share repurchase program and channeled all its FCF (Free Cash Flow) after dividends into debt repayment. In just one year, the company has reduced its leverage ratio from 3.23 in fiscal 2014 to 2.25 in fiscal 2015. It has resumed its share repurchase at the same time. Fiscal year 2018.
In its August 8 press release on the acquisition of Symantec Enterprise Security, Broadcom stated that it would continue to pay 50% of its FCF as dividends and use the rest of the money to repay your debt. The Company expects to generate approximately $ 11 billion in free cash flow in fiscal 2019. The addition of Symantec's Enterprise Security division is expected to increase Broadcom's FCF starting in fiscal year 2020 and to -of the.
Broadcom stock sensitive to US-China trade war
Broadcom derives 50% of its revenue from China. One of its main customers is the Chinese company Huawei, which buys network products such as switches. However, the United States banned shipments to Huawei on May 15.
In addition, the United States and China have increased tariffs on their reciprocal imports, making products more expensive. This trade war has slowed global economic demand, especially in China, and has accumulated stocks in the supply chain. Given these factors, Broadcom has reduced its revenue forecast for the 2019 fiscal year by $ 2 billion, which set at $ 22.5 billion in June.
Although the United States has eased the Huawei striking ban, replicas of this ban have reduced the reliability of their US chip suppliers. Thus, Huawei has reduced its reliance on US chip suppliers and has looked for alternatives elsewhere.
Huawei is still buying some of its requirements from US chip suppliers, but has reduced the volume of orders. In today's earnings report, Broadcom should shed some light on the impact of the current state of trade war on its orders.
Broadcom stock in a technical upward trend
If we look at the Broadcom share price dynamics, Broadcom's stock price is moving upward in the long run. Its MA (moving average) takes the average of the price of a stock over a period of time and shows a smooth trendline excluding ups and downs.
Broadcom's 200-day inventory management ad has continued to grow. Its 200-day MA has grown 17.8% since the beginning of the year, which is in line with its 17.5% rise in share price. Although its overall trend in the stock is on the rise, there have been five brief instances where the stock has fallen below its 200-day MA and three times above the $ 300 mark. The three cases of AVGO stock exceeding the $ 300 mark occurred when the tensions of the trade war with China showed signs of easing.
Can Broadcom's share break the $ 300 mark?
The technical trend above indicates that the Broadcom stock could potentially break the $ 300 mark, provided the US-China trade war does not escalate. Wall Street analysts have a consensus price target of $ 315. These analysts are divided on the stock, 60% giving a buy recommendation and 40% a retainer recommendation.
In our opinion, the Broadcom stock is not a good buy at the current price of $ 298. However, investors who already have a position in the stock should keep it because it offers a strong dividend and growth potential of less than or equal to 10%.
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