LGIH...Are we missing this?

Thanks to this board, I invested in AVGO (Broadcom Ltd) a few months ago. Saul no longer has it listed as one of his holdings. I am thankful I still own every share.

Earnings and price have continued to move up beautifully for the past 3 years making it a top performer, easily surpassing AMZN and LGIH by almost 3 to 1.

Perhaps this company deserves some more love among the many astute investors that frequent this board? Perhaps there is something about this company I am over looking? A quick earnings and growth comparison for the 3 and 5 year past performance may surprise some of you.

Thanks,

Jim

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since you own it, what’s causing the share count to go up like it is? Was it all due to the Broadcom acquisition (I don’t follow story)? And all the growth is via acquisitions, right? What’s your opinion of the current business - how fast can it grow?

file:///C:/Users/TIS/Downloads/Broadcom%20to%20Acquire%20Brocade%20Investor%20Presentation.pdf
Looks like they are buying Brocade now

Looks like a good deal? 5.5b for almost 365m FCF (per VL 2017)?

thoughts?

sorry - bad link

on top of page under presentations:
http://investors.broadcom.com/phoenix.zhtml?c=203541&p=i…

Thanks to this board, I invested in AVGO (Broadcom Ltd) a few months ago. Saul no longer has it listed as one of his holdings.

Hi Jim, Sorry, but I never followed Broadcom and never invested in it. That doesn’t mean its not a good investment, just that I don’t know anything about it.
Saul

Hi Saul-acolytes.

[I say that in the “assistant” sense because, while Saul is helping us all, we’re also all helping each other.]

I have some insight into AVGO because it is - loosely - a SWKS competitor. But my knowledge isn’t very deep, as I don’t own shares of AVGO. I do find it intriguing enough that it remains on my Watch List, though.

I’m going to take a first quick-cut at this based on my Value Line subscription and some information from the company web site. If someone else wants to take up the charge and dig deeper, please do! I think this is a worthwhile company to know more about, but I can only devote limited time to it right now.

I thought about labeling the bullet points below “pros” and “cons”, but that would overlay the facts with my prejudices, so I’ll just call them all “observations”. I’ll probably compare to SWKS a bit since it is probably more familiar to many of you.

* Broadcom (AVGO) is a foreign corporation.

Avago bought Broadcom and took on the Broadcom name. The company is based in Singapore with a Cayman Islands subsidiary. Since acquiring Broadcom, though, the company appears to file with the SEC as if it is U.S.-based (i.e., the last three quarterly filings have been on SEC Form 10-Q).

* Avago (now called Broadcom) is a very acquisitive company.
http://www.broadcom.com/company/timeline/

I’m not sure whether this list is complete, but it gives a sense…
2013: Javelin Semiconductors and CyOptics
2014: LSI Corp and PLX Technology
2015: Emulex
2016: Broadcom

* Broadcom has a substantial debt load.

AVGO has almost $14 billion in debt as of the end of July 2016, although only one-quarter of that debt is due in the next five years. I think the debt load is primarily a result of the acquisitions. For comparison, FY16 revenues were probably in the $13 billion range.

* Broadcom’s share performance has been awe-inspiring.

In 2012, AVGO traded in a $28-40 range. It is over $170 now.

* Recent earnings have been marred by acquisition-related costs.

AVGO’s fiscal 2Q16 loss was almost $3.00 per share. Combined with a 3Q16 loss, AVGO will not have a profitable year. These are GAAP numbers I’m offering you - I’m sure non-GAAP looks much better.

* It is not clear that AVGO is over-valued.

Certainly the current numbers (at least the GAAP numbers) paint a horrible picture. However, Value Line expects (as of 9/30/16) FY17 earnings to be $7.75, so you have a forward PE in the ballpark of 20x. AVGO has been growing revenue and earnings at around that rate or better.

* AVGO is one of the few companies I’m aware of that increases its dividend every quarter.

AVGO started paying a dividend in 2011, but I don’t know (without further resaerch) what the quarterly numbers were that year. But, since 2012, the dividend has increased every quarter sequentially. For example, in FY15, the quarterly dividends were $0.38, $0.40, $0.42, and $0.44. That is unusual and remarkable (and, well, I’ve just remarked on it). Sequential growth slowed in 2016, after a big jump between the 12/15 and 3/16 payments ($0.44 to $0.49). The current dividend yield is in the 1.1-1.2% range.

* Broadcom’s product set is broader (if you will) than SWKS’.

I am not 100% certain of this, but I don’t think the two are pure competitors. I think you may find some AVGO components in SWKS products and vice versa. But they compete too. There are some areas where Broadcom competes, though, that SWKS is not in that market. I think, though, that AVGO competes in every market where SWKS is present.

That’s all I have right now. Who wants to take the next step?

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: SWKS; AVGO is on my Watch List)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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Bob

Thanks for sharing a great outline of your Broadcom thoughts with the board. I’m encouraged that they have increased its dividend every quarter.

It’s many recent acquisitions make it tough to peg share value. It’s large debt does makes me pause…14 billion dollars.

However, the share price continues to climb. Obviously somebody is bullish on the company prospects.

Jim

Certainly the current numbers (at least the GAAP numbers) paint a horrible picture. However, Value Line expects (as of 9/30/16) FY17 earnings to be $7.75, so you have a forward PE in the ballpark of 20x. AVGO has been growing revenue and earnings at around that rate or better.

just a thought and up to you, but i have the same VL sheet. Couple small points:

*EPS predictibility is 35. So in the short history the estimates have been iffy.

*given the amount of goodwill amortization from the acquisitions, looking at cash flow per share vs. CapEx might give a truer pic of valuation here. Using VL’s figures that $14.50 a share and $1.65 respectively, or over 5b in projected free cash flow. At $175, the cap is about $68b so the 5b looks interesting even with the 12b in debt. Course, the problem with this ‘analysis’ is that 35 above. I don’t know a thing about this business model.

*as noted in the previous post, they are also buying Brocade (BRCD) for $12.75 a share. You can pull the VL sheet on that - at 12.75, they are paying about 5 to 5.5b billion with maybe 500m more in net debt. Given VL projected 1.15 cash flow and 20c CapEx in 2017 for that company or 375m, paying ~6b doesn’t seem that expensive if you can believe all these numbers. Course, Brocade only grew 5 year revenue by 3.5% the past 5 years (per VL) so I don’t know how great this asset really is, but the price seems pretty good. I don’t know zip about the previous acquisitions but this is a good sign maybe.

Course, all of this is numbers playing. You’d have to have a decent opinion on the underlying business (and the roll-up strategy), and I know zip. Thus, when they show the combined company’s operating model (slide 5 in that presentation linked previously), it is hard to know whether to think it is credible or not.

just 2c

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I’m encouraged that they have increased its dividend every quarter.

just a different view, but I see it as kinda nutty - I mean, they have a ton of debt and anybody who wants to own this wants to own it as a growth company. Why would anyone care about a dividend here? It doesn’t make a lot of sense, but obviously they have their reasons.

Course, I can’t find a 10K on their website or the 2015 annual report…

final post - morningstar, which is a good cheap source for many stocks (and often free from the public library) likes the deal (a snippet):

Analyst Note
Brian Colello, CPA, Sector Director, 01 November 2016

On Oct. 31, Bloomberg reported that Brocade
Communications is in advanced talks to sell itself, with
Broadcom noted as one of the possible interested buyers.
Brocade’s stock rose 22% on the news toward our
unchanged $11 fair value estimate, and we would agree
with prospective buyers that Brocade’s business was
undervalued in the $8.70 range prior to the Bloomberg
report. We would recognize some financial and strategic
sense in such a deal for Broadcom, if it were in fact to
acquire Brocade at a reasonable price. We will maintain
our $165 fair value estimate and narrow moat rating for
Broadcom until if and when a deal is announced.

In short, this acquisition could make Broadcom more of a
vertical player in networking and storage gear. The upside
would be cost savings on chipsets used to run these
various boxes in the data center. Our biggest concern,
however, is that the strategy would put Broadcom in more
direct competition with some of its key customers, such
as Cisco.

For Broadcom, we recognize the financial sense of such a
deal (obviously depending on the final price), as the Avago
management team, which bought Broadcom in a deal that
closed in early 2016, has shown a knack and an intention
to roll up undervalued businesses where it can extract
significant operating synergies. We viewed Brocade as
fundamentally undervalued prior to the takeover news,
and although Brocade’s core Fibre Channel business is in
secular decline, we don’t see this business evaporating to
zero overnight. Meanwhile, we would expect hefty
operating synergies if such a deal were to occur, and we
even see the potential of Broadcom paring down some of
Brocade’s non-FC businesses, such as those in IP
networking, if the company wanted to streamline
operations even further.


course, this is just one person’s opinion, but the vibe is pretty positive.

I need to get out more often and get beyond the things I usually look at. Thanks to drillerjim for posting…

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just a different view, but I see it as kinda nutty - I mean, they have a ton of debt and anybody who wants to own this wants to own it as a growth company. Why would anyone care about a dividend here?

Because the entire point of buying a growth company is that eventually the earnings get passed on to shareholders in one form or another. That could be through share buybacks which raise the stock price, reinvesting in growth to increase their market share, or paying out a dividend. In order to get any sort of income or profit from a growth stock, you have to actually sell it. That relies upon a solid understanding of their business model, but also properly timing the market and the individual stock price. Growth stocks paying an increasing dividend can be held indefinitely, or until the thesis changes and you want out.

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getting off the beaten path - this is Saul’s board, so rather than me post again I posted a reply elsewhere if interested

Here:
http://discussion.fool.com/response-32498856.aspx?result=NewPost…

Interesting company. Free cash flow has gone from about $450 million for the year ended 10/2012 to about $2 billion for the trailing 12 months. It looks like the dividend is currently costing around $800 million per year. Of course, that amount will grow if they continue to raise the dividend every quarter. As mentioned by others, long term debt has grown significantly due mostly, I would assume, to acquisitions.

Don

Is it safe to assume you all are still talking about AVGO (Broadcom Ltd), and not LGIH?

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