Broadcom Inc Valuation – April 2018 $AVGO

Company Profile (excerpt from Reuters): Broadcom Limited, incorporated on March 3, 2015, is a designer, developer and global supplier of a range of semiconductor devices with a focus on digital and mixed signal complementary metal oxide semiconductor (CMOS)-based devices and analog III-V based products. The Company operates through four segments: Wired Infrastructure, Wireless Communications, Enterprise Storage and Industrial & Other. It offers a range of products that are used in end-products, such as enterprise and data center networking, home connectivity, set-top boxes (STBs), broadband access, telecommunication equipment, smartphones, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Its product portfolio ranges from discrete devices to complex sub-systems that include multiple device types, and also includes firmware for interfacing between analog and digital systems. Its products include mechanical hardware that interfaces with optoelectronic or capacitive sensors.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AVGO – April 2018

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 $93,602,964,886 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 5.70 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 402.17% Pass
6. Moderate PEmg Ratio PEmg < 20 32.68 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.90 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 5.70 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.89 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass


Stage 2: Determination of Intrinsic Value

EPSmg $7.25
MG Growth Estimate 15.00%
MG Value $279.23
Opinion Fairly Valued
MG Grade D+
MG Value based on 3% Growth $105.16
MG Value based on 0% Growth $61.65
Market Implied Growth Rate 12.09%
Current Price $236.99
% of Intrinsic Value 84.87%

Broadcom Ltd does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $1.77 in 2014 to an estimated $7.25 for 2018. This level of demonstrated earnings growth supports the market’s implied estimate of 12.09% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

At the time of valuation, further research into Broadcom Ltd revealed the company was trading above its Graham Number of $146.88. The company pays a dividend of $4.08 per share, for a yield of 1.7% Its PEmg (price over earnings per share – ModernGraham) was 32.68, which was below the industry average of 51.31, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-40.9.

Broadcom Ltd scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$40.90
Graham Number $146.88
PEmg 32.68
Current Ratio 5.70
PB Ratio 3.90
Current Dividend $4.08
Dividend Yield 1.72%
Number of Consecutive Years of Dividend Growth 7

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2018
Total Current Assets $11,220,000,000
Total Current Liabilities $1,970,000,000
Long-Term Debt $17,475,000,000
Total Assets $54,544,000,000
Intangible Assets $40,070,000,000
Total Liabilities $28,643,000,000
Shares Outstanding (Diluted Average) 426,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $19.32
Oct2017 $4.02
Oct2016 -$4.86
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

EPSmg History
Next Fiscal Year Estimate $7.25
Oct2017 $1.29
Oct2016 $0.31
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

19 Best Stocks For Value Investors This Week – 1/9/16
Avago Technologies Ltd Valuation – January 2016 Update $AVGO
The Best Stocks of the IT Hardware Industry – September 2015
19 Best Stocks For Value Investors This Week – 8/29/15
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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