Updated from April 22 Shares of communications chipmaker Broadcom ( BRCM) spiked as analysts substantially boosted their profit estimates after the company reported a resoundingly strong first quarter. Late Thursday, Broadcom issued generous June quarter sales guidance on top of consensus-beating revenue for the first quarter of 2004. 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 of 48% in broadband chips as the most impressive. Broadband now accounts for 29% of sales at Broadcom. Mishan raised his 2004 earnings per share estimates to $1.30 from $1, with expected revenue at $2.55 billion, up from a prior estimate of $2.35 billion. "As strange as it sounds, Broadcom appears to be trading at a reasonable P/E multiple," wrote Mishan. Based on Thursday's closing price of $40.80, the stock trades at 31 times 2004 EPS and 29 times 2005 EPS -- "not bad given the growth and profitability profile," he concluded. (Mishan has an outperform rating on Broadcom; his firm hasn't done investment banking for the company.) At Legg Mason, Cody Acree kept his hold rating on the shares, though he praised the quarter in a morning note. "Similar to what we are seeing across the rest of the chip industry, Broadcom's lack of seasonal impact is encouraging evidence of the sector's improving momentum and a level of stronger economic demand, which is now not only being driven by attractive consumer spending, but increasingly being supported by growth in enterprise and infrastructure activity," he wrote. Acree hiked his sales and earnings estimates for the company by substantial amounts, with the resulting estimates for 2004 about on par with those of CIBC's Mishan.
But Acree refrained from recommending the shares, saying many of Broadcom's end-markets are volatile and prone to inventory excesses and corrections. Acree believes that at least some of the growth in Broadcom's March quarter reflects inventory restocking in the electronics industry -- which had pared down inventories to the bare minimum over the past two and a half years -- rather than a more sustainable longer-term increase in demand. If that proves to be the case, Acree suggests, the recent strength seen at Broadcom will likely continue through the first half of the year but could perhaps taper off a little afterwards. (Legg Mason hasn't done banking for Broadcom.)
Monster SalesFirst-quarter sales rose 75.1% from last year's levels to $573.4 million, above the consensus estimate for $562.6 million. On a sequential basis, the strongest growth came from Broadcom's broadband communications and mobile and wireless group. Sequential revenue growth of 19.7% outpaced the company's updated February guidance for 16% to 18%. Broadcom had initially predicted only 10% growth when it first delivered a first-quarter sales outlook in January. Quarterly net income totaled $39.9 million or 12 cents a share, up from a net loss of $67.9 million for the same period last year. On a pro forma basis, profit amounted to 29 cents a share, 2 cents better than expected. In the first quarter, Broadcom had three customers that accounted for more than 10% of sales: Hewlett-Packard ( HPQ), at 13.9% of revenue; Cisco ( CSCO), at 10.9%; and Motorola ( MOT), at 10.3%. On the guidance front, Broadcom said June quarter revenue should increase 10% over the prior quarter. That implies sales of around $630.7 million, well above the consensus estimate for $591.3 million.
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).