Updated from April 22 Shares of communications chipmaker Broadcom ( BRCM) spiked as analystssubstantially boosted their profit estimates after the company reported a resoundingly strongfirst quarter. Late Thursday, Broadcom issued generousJune quarter sales guidance on top ofconsensus-beating revenue for the first quarter of2004. The stock was recently up $2.77, or 6.8%,to $43.57. At CIBC, Allan Mishan called Thursday's results a"monster report," singling out sequential growth of48% in broadband chips as the most impressive.Broadband now accounts for 29% of sales at Broadcom. Mishan raised his 2004 earnings per shareestimates to $1.30 from $1, with expected revenue at$2.55 billion, up from a prior estimate of $2.35billion. "As strange as it sounds, Broadcom appears tobe trading at a reasonable P/E multiple," wroteMishan. Based on Thursday's closing price of $40.80,the stock trades at 31 times 2004 EPS and 29 times2005 EPS -- "not bad given the growth and profitabilityprofile," he concluded. (Mishan has an outperform rating onBroadcom; his firm hasn't done investment banking forthe company.) At Legg Mason, Cody Acree kept his hold rating onthe shares, though he praised the quarter in a morningnote. "Similar to what we are seeing across the restof the chip industry, Broadcom's lack of seasonalimpact is encouraging evidence of the sector'simproving momentum and a level of stronger economicdemand, which is now not only being driven byattractive consumer spending, but increasingly beingsupported by growth in enterprise and infrastructureactivity," he wrote. Acree hiked his sales and earnings estimates forthe company by substantial amounts, with the resultingestimates for 2004 about on par with those of CIBC'sMishan.
But Acree refrained from recommending the shares,saying many of Broadcom's end-markets are volatileand prone to inventory excesses and corrections. Acreebelieves that at least some of the growth inBroadcom's March quarter reflects inventory restockingin the electronics industry -- which had pared downinventories to the bare minimum over the past two anda half years -- rather than a more sustainablelonger-term increase in demand. If that proves to be the case, Acree suggests, therecent strength seen at Broadcom will likely continuethrough the first half of the year but could perhapstaper off a little afterwards. (Legg Mason hasn't donebanking for Broadcom.)
On a postclose conference call, management said bookings had continued to be "very strong" into the month of April. Although the company is seeing broad-based increases in demand, it said its broadband and mobile and wireless groups should once again offer what it called the "most dynamic" growth. In the June quarter, gross margin should decline modestly, by about 50 basis points. Broadcom didn't issue a specific earnings forecast, but Wall Street analysts had expected 28 cents heading into the call. Boasting about its diverse product line, Broadcom management also noted that so far this year, broadband chips are shaping up as the company's fastest-growing product segments, edging out mobile and wireless, which lead in 2003. In 2002, networking silicon ranked as the top grower. Broadcom sells chips into four markets, including enterprise computing (such as servers and storage); networking infrastructure (Ethernet and broadband access); mobile and wireless (wireless local area network and Bluetooth); and broadband communications (home broadband services such as digital subscriber line and cable modems).