NEW YORK ( TheStreet) – Broadcom (BRCM) posted a stellar year, fueled by the semiconductor solution company's broadband and connectivity business. And while the Irvine, Calif., company hit a new 52-week high of $43.35 on Nov. 28 and its shares are up 47.5% year to date, a question investors are likely asking is whether the stock has more room to run.
It does. And it's unlikely to end anytime soon.
There are several different factors to take into account, when assessing Broadcom's future performance. For starters, there is the upcoming December analyst day. During the past two years, the stock has popped higher on Broadcom's annual December analyst day.
This year's analyst event on Dec. 9 will likely focus on the company's expansion into the Internet of Things, which includes its WICED Sense Bluetooth Smart Sensor Tag. The $20 product allows the owner to link their mobile device to gather data via sensors and the advanced security ensures privacy on this wearable device. And as you know, wearables is an ever increasing market.
Broadcom will also point to its 40 additional partners for its expansion into the Ethernet IC market, as well as its prospects in the fast-growing Ultra-HD 4K TV market with its high-efficiency video coding in set-top boxes.
But perhaps one of the greatest drivers that will continue its monster stock performance of 2014 is that the stock still only trades at a forward PEG ratio of 1.11x, allowing for multiple expansion.
This, of course, doesn't take into account that in the last four years the company has typically topped quarterly Wall Street earnings estimates by 4 to 5 cents. So, Wall Street's current $3.28 per share projection for 2015 could be closer to $3.50.
Investors also may potentially see more dividend and share repurchase programs unveiled in the New Year, which is always a catalyst for driving shares higher. Early this year, management raised the quarterly dividend by 9% to 12 cents per share, with a 1.11% dividend yield. In the third quarter, Broadcom repurchased 6 million shares at an average price of $37.86 per share under its evergreen buyback program.
Additionally, the charts and options activity are both supportive of more gains to come before 2014 wraps up.
The 17-year monthly chart above shows the entire trading history of Broadcom shares. Since its 2002 bottom, the stock has been trading in an ascending triangle, otherwise known as a bullish technical pattern. Last year, Broadcom made a higher low in a pattern that now exceeds 14 years.
And, more importantly, Broadcom is now within just a few dollars of the $47.07 major resistance level. Look for a continuation of the bullish momentum to the $45-$47 area. If at some point the breakout finally occurs, it could propel shares back into the $50-range for the first time since 2001.
Shares of Broadcom trade at a P/E ratio of 13.15x, based on 2015 estimates. It's earnings per share is projected to grow 11.9% in 2015, compared with 7.7% this year.Revenue estimates, however, call for a stagnate 2015 at $8.36 billion due to the winding down of the company's cellular baseband chipset unit. And while this move will cost the company roughly $378 million in charges and shrink its workforce by about 20%, the net effect of this decision will be a positive one as it exits a competitive and money losing venture.
For the most part, Wall Street analysts are positive on Broadcom. Nearly two dozen analysts have "buy" ratings on the company, while 12 have "hold" ratings and one a "sell" rating. The most recent and arguably the most influential rating change came from Goldman Sachs. On Nov. 13, Goldman's Mark Delaney upgraded the stock to a "buy" from a "hold" and boosted its price target to $48 from $40.
The most recent short interest data shows nearly 100,000 shares were covered in the latest period to bring the total to just over 10.6 million shares. Currently, the percentage of the float sold short stands at just 1.94%.
And on Nov. 26, according to data provided by LiveVolPro, more than 12,000 Jan 17 2015 $45 calls were purchased for 74 to 96 cents throughout the day. The largest print by far was a buyer of 8,838 contracts for 86 cents each. On the same day, over 3,000 Dec 20 $42.50 calls were bought for $1.35 to $1.60. Less than two weeks prior to this activity on November 17th, roughly 16,000 Dec 20 $44 calls were purchased for 48 to 66 cents. The next known catalyst that these $1 million call premium bets could be on Broadcom's analyst day.
The break-even point on the large Jan 17 2015 $45 call buyer is at $45.86, or 6.3% above the current share price on January monthly expiration.
Any investment has risks and Broadcom is no exception. If stagnant returns from its other revenue source in the infrastructure and networking segment continues or becomes worse in 2015, it could weigh on the possibility of achieving its expected 12% or more growth in earnings. Investors obviously don't want to see a reversal of the margin expansion the company has been achieving, especially since it will be needed next year to offset the discontinuation of Broadcom's cellular baseband segment. Nonetheless, Broadcom is one company to consider holding onto, or getting long via January call spreads on any pullback heading into the December analyst day.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
TheStreet Ratings team rates BROADCOM CORP as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate BROADCOM CORP (BRCM) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: BRCM Ratings Report