Broadcom Limited Valuation – July 2016 $AVGO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today - July 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Broadcom Limited (AVGO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Broadcom Limited is a semiconductor company. The Company offers a range of products in end-markets, including wired infrastructure, wireless communications, enterprise storage, and industrial and others. The Company’s products are used in various applications, including data center networking, home connectivity, broadband access, telecommunications equipment, smartphones and base stations, data center servers and storage, factory automation, power generation and alternative energy systems, and displays. The Company’s product categories include broadband access and modems, enterprise and network processors, Ethernet communication and switching, set-top box and media processors, wireless infrastructure and wireless connectivity. Its broadband access and modems category consists of products, such as Universal 1024 quadrature amplitude modulation (QAM) Modulator, Universal DOCSIS 2.0-Based Downstream Modulator and QAMLink DOCSIS/EuroDOCSIS 2.0 Single-Chip Cable Modem.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of AVGO – July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $65,838,312,108 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.52 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -1842.86% Fail
6. Moderate PEmg Ratio PEmg < 20 50.69 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.46 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.52 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.63 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

AVGO value chart July 2016

EPSmg $3.24
MG Growth Estimate 14.09%
MG Value $118.84
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $46.98
MG Value based on 0% Growth $27.54
Market Implied Growth Rate 21.09%
Current Price $164.23
% of Intrinsic Value 138.19%

Broadcom Ltd is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1.67 in 2012 to an estimated $3.24 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 21.09% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Broadcom Ltd receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

AVGO charts July 2016

Net Current Asset Value (NCAV) -$60.28
Graham Number $66.34
PEmg 50.69
Current Ratio 2.52
PB Ratio 3.46
Current Dividend $1.75
Dividend Yield 1.07%
Number of Consecutive Years of Dividend Growth 6


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Most Recent Balance Sheet Figures

Balance Sheet Information 4/1/2016
Total Current Assets $6,687,000,000
Total Current Liabilities $2,651,000,000
Long-Term Debt $14,664,000,000
Total Assets $51,407,000,000
Intangible Assets $41,720,000,000
Total Liabilities $31,705,000,000
Shares Outstanding (Diluted Average) 415,000,000

Earnings Per Share History

Next Fiscal Year Estimate $3.92
Oct2015 $4.85
Oct2014 $0.99
Oct2013 $2.19
Oct2012 $2.25
Oct2011 $2.19
Oct2010 $1.69
Oct2009 -$0.20
Oct2008 $0.38
Oct2007 -$0.74

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.24
Oct2015 $2.76
Oct2014 $1.77
Oct2013 $1.98
Oct2012 $1.67
Oct2011 $1.14
Oct2010 $0.49
Oct2009 -$0.11
Oct2008 -$0.07
Oct2007 -$0.25

Recommended Reading:

Other ModernGraham posts about the company

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The Best Stocks of the IT Hardware Industry – September 2015
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Avago Technologies Ltd Analysis – Initial Coverage $AVGO

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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