Lehman Offers Bullish Take on Broadcom

The firm raises its rating and price target on the stock.
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Lehman Brothers raised its investment rating on

Broadcom

Tuesday, citing strength in the company's networking and cable businesses.

The company's enterprise networking unit, which makes up 31% of overall revenue, is likely to improve with the ramp-up of Gigabit Ethernet, analyst Arnab Chanda said. And after two years of weak performance, Broadcom's cable unit, representing 19% of revenue, has also started to pick up.

Based on these premises, the analyst upgraded the company to overweight from equal weight with an increased target price of $35, from $25.

Recently, shares of Broadcom were rising 3.2% to $29.45 on the

Nasdaq

.

Additionally, Chanda sees the company's emerging market business boosting revenue. Specifically, wireless local area network technology, such as wireless handsets, DSL and satellite set-tops, will likely fuel growth and has already become a double-digit revenue driver for Broadcom. Also, the company's 802.11g products will be strong in the second and third quarters, according to the analyst.

Broadcom's server business, however, is likely to decrease as the two-way chipset has competition from

Intel

(INTC) - Get Report

. This could cause the company to lose share from its current 80% stake, Chanda said, as four-way chipset servers, which Intel will be launching this year, will grow faster than two-way.

In the end, Chanda believes the company's management is so focused on profitability that earnings may outpace revenue growth. In the second quarter, the analyst sees earnings upside potential of 1 cent to 2 cents a share vs. Lehman's estimate of 9 cents.

Broadcom could also top Lehman's revenue growth estimates, Chanda said. The company has forecast 6% to 8% quarter-over-quarter growth, compared with Chanda's 5% estimate.