Why Broadcom (BRCM) Stock Is Surging This Morning

NEW YORK (TheStreet) -- Shares of Broadcom Corp. (BRCM) are surging in pre-market trade, up 12.96 % to $36.00, after the company announced that it's exploring strategic alternatives for its cellular baseband business, including a potential sale or wind-down.

The company said it engaged JP Morgan (JPM) in connection with its efforts.

The successful sale or wind-down of the cellular baseband business is currently expected to result in a roughly $700 million reduction in annualized GAAP research and development and selling, general and administrative expenses, of which approximately $100 million relates to estimated reductions in stock-based compensation.

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Broadcom said non-GAAP research and development and selling, general and administrative expenses are currently expected to be reduced by roughly $600 million. 

TheStreet Ratings team rates BROADCOM CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate BROADCOM CORP (BRCM) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, deteriorating net income and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • BRCM's debt-to-equity ratio is very low at 0.16 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, BRCM has a quick ratio of 2.30, which demonstrates the ability of the company to cover short-term liquidity needs.
  • Net operating cash flow has significantly increased by 56.18% to $606.00 million when compared to the same quarter last year. In addition, BROADCOM CORP has also vastly surpassed the industry average cash flow growth rate of 3.25%.
  • The gross profit margin for BROADCOM CORP is rather high; currently it is at 54.54%. Regardless of BRCM's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, BRCM's net profit margin of 8.31% is significantly lower than the industry average.
  • Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, BRCM has underperformed the S&P 500 Index, declining 12.06% from its price level of one year ago. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. In comparison to the other companies in the Semiconductors & Semiconductor Equipment industry and the overall market, BROADCOM CORP's return on equity is significantly below that of the industry average and is below that of the S&P 500.
  • You can view the full analysis from the report here: BRCM Ratings Report

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