Broadcom is a global leader in semiconductor products for wired and wireless communications. Broadcom operates in three key business groups: Mobile & Wireless, Infrastructure & Networking, and Broadband Communications.
We reiterate a BUY rating and $40 target for Broadcom following strong results and a guide impacted by a soft macro environment across multiple
verticals. We expect strong design win momentum for Mobile and Wireless combined with a cessation of macro headwinds to drive above
seasonal recovery in H2/13. Our estimates are trimmed on Q1 headwinds. Investment highlights
BRCM reported Q4/12 (Dec) after the close. Revenues and EPS were $2.080 billion (-2% Q/Q) and $0.76. This compared to consensus of
$2.066 billion and $0.73 and our estimates of $2.060 billion and $0.75. Broadband grew 1% sequentially, while Mobile & Wireless (-
1% Q/Q) and Infrastructure & Networking (-9% Q/Q) declined sequentially.
The company guided MarQ revenue down 9% Q/Q at the midpoint ($1.9 billion), below the consensus view of $2.004 billion and our estimate of $2.015 billion. Implied EPS guidance of $0.54 was below consensus expectation of $0.
Infrastructure & Networking, while Mobile & Wireless is expected to decline slightly worse than 9% sequentially.
BRCM raised its quarterly dividend 10% from $0.10 to $0.11.
BRCM’s price target of $40 is 13x our C2014 EPS estimate of $3.06 plus net cash of $1.62/share.
We maintain our BUY rating as we expect improving construction market trends to help support P&L momentum. With contribution margins of 40%+, we find HW very well positioned to outperform in a housing/construction market recovery. Investment highlights
New residential construction continues to drive improvement in light building products (full impact expected later in ’13 given lagging impact and seasonality), while flyash volumes were softer than expected on weather, outages and lower electricity demand (offset by price).
Guidance gets tweaked up slightly to incorporate Kleer Lumber and improving end-markets (~$110-125M from $100-115M), while not yet factoring a pick up in repair/remodel activity. We do note difficult comps in Q2 given unusually mild conditions in 2012.
Our conservative estimates adjust as follows: F2013 rev/EBITDA/ EPS to $702.6M/$111.3M/$0.19 from $688.0M/$105.6M/$0.09; F2014 to $748.0M/$124.3M/$0.27 from $734.0M/$124.5M/$0.27. Valuation
We apply a multiple of 9.6x EV/FY2014 EBITDA (F2014E EBITDA of $124.5M) to reach our $12.00 target. Risks Volatility in residential construction markets, uncertain flyash regulations/demand and a highly leveraged balance sheet.
Carl Icahn disclosed his stake in Transocean increased to 5.6% late Friday, sending shares of the offshore driller higher. Additionally he has asked management to declare a dividend of at least $4 per share, and has said that if the company doesn‘t, he will propose it at the next shareholder meeting. He said, in a filing, ―Under Swiss law and the Issuer’s Articles of Association, a shareholder has the right to propose a dividend at a company’s annual meeting, and if a majority of shareholders support the proposal, the dividend is declared, whether or not the company’s board supports such proposal.
Transocean responded in a statement that read, ―We will review Mr. Icahn’s filing carefully and respond in due course. We appreciate the opportunity to hear from our shareholders and look forward to continuing a dialogue with Mr. Icahn.
As always, the Transocean Board of Directors will set dividend policy on the basis of financial prudence and the best interest of
shareholders.‖ Transocean initiated a dividend in 2011, but was forced to abandon the payouts in an effort to maintain its balance sheet and investment-grade rating on its debt
The cover story of last weekend’s Barron’s “The Next Boom” presents a fairly bullish case for the revival of
America’s manufacturing industry.
“Made In The U.S.A.” used to account for nearly 40% of the things made globally. Today, American pride only makes 18% of good sold worldwide. But that is about to change, Barron’s highlights that the weak dollar, stagnant wages, and cheap energy (natural gas) are drawing manufacturing jobs back to the U.S.
Cheap natural gas not only reduces the U.S. trade deficit, it makes American factories more competitive globally. This is why many U.S. manufacturers and interest groups are opposed to plans from LNG exporters to permit the unlimited export of natural gas abroad.
Peter Huntsman, President and CEO of Huntsman (HUN), stated last week, “We think it very short-sighted and bad public policy to allow our
nation‘s natural gas advantage to be stripped and sent overseas to build a new manufacturing base that would otherwise be built here in the U.S.” Companies like Apple (AAPL), Caterpillar (CAT), Ford Motor (F), General Electric (GE), and Whirlpool
(WHR) that are making more of an effort to make their goods in the U.S. again.
In addition, Samsung is building a semiconductor plant in Texas, Airbus SAS is building a factory in Alabama and Toyota (TM) wants to begin exporting minivans made in States to Asia. Quoting the National Association of Manufacturers, Barron’s notes that for every dollar spent on manufacturing, another $1.48 is added to the economy. Manufacturers account for two-thirds of what the private sector spends on research and development. Barron’s has named eight companies that should prosper in the natural gas fueled manufacturing revival: Southwestern Energy (SWN), LyondellBasell Industries (LYB), Nucor (NUE), Dover (DOV), Calpine (CPN), CF Industries (CF), Williams (WMB) and Union Pacific (UNP).
”Brookfield Renewable Energy Partners has increased its all-cash offer for the shares of Western Wind to $2.60/share from $2.50/share and has extended the expiry time of the offer to February 11, 2013 from January 28, 2013. BEP.UN indicates that 22% of independent shareholders have either entered into lock up agreements or have advised that they will tender the shares to the offer.
While this may seem like a no-brainer for Western Wind shareholders as it represents a 119% premium to the share price prior to the nouncement that it was for sale (July 28, 2012)…we suspect the Western Wind CEO will continue to posture for an even sweeter bid. Just a couple days ago, BEP.UN demonstrated their frustration with Western Wind, saying there were terminating discussions. Upon making its offer in November 2012, the company said its preferred approach was to work with the Board and the advisors towards a Board supported transaction.
However the gloves have now come off. In a recent press release, BEP.UN said, ―Unfortunately, based on Western Wind’s conduct since
commencement of the Offer it appears that Western Wind, and in particular, its CEO, has no intention of selling the Company.
In fact, Brookfield Renewable’s recent discussions with Western Wind appear to have been orchestrated by the Company to enable it to issue its January 22, 2013 news release as well as its Notice of Change to its Supplementary Director’s Circular, and raise shareholder expectations that a revised proposal will be made, despite there being no agreement or understanding between the parties regarding a proposal or its terms.‖ BEP.UN also points to the fact that Western Wind said 56 parties were interested in acquiring the company, yet no alternative proposals have emerged.
Interestingly, management of Western Wind has also managed to convince its board of directors to approve early payments of their change of control payments (despite the fact that no sale was on the horizon). Ciachurski received approximately $3 million. Better yet, Ciachurski continues to have a special bonus arrangement in which he would receive another $3 million if he gets $3.00 a share for the company…aka…the battle is
likely not over .
Shares of the drybulk shippers rose as higher demand for capesizes drove shipping rates up. The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying dry commodities, rose for a eleventh straight day on Thursday on higher demand for capesizes. The main index, which gauges the cost of shipping commodities such as iron ore, cement, grain, coal and fertilizer, rose 39 points, or 4.99 percent, to 820 points.
For a company that is still expected to grow, albeit at a much reduced rate, that’s an attractive valuation.
Importantly, Apple also has $135 billion of cash and no debt. Much of this cash is available to be returned to shareholders in the form of stock buybacks and, possibly, dividend increases. So it’s worth considering Apple’s market value and multiple excluding this cash.
Excluding its cash, Apple’s business is now valued at about $300 billion, or 2X revenue. Apple’s business currently earns about $40 billion a year. So Apple’s business is valued at about 7-times earnings.
That’s an even more attractive valuation. Even when you consider that Apple’s earnings are now declining.
Think about it this way.
If you spent $425 billion to buy Apple today–the whole company, not some shares of stock–you would be able to immediately pocket the $135 billion of Apple’s cash. You would then own a business that spits out about $40 billion of cash per year. Assuming the business maintains close to this level of earnings, you would get the remaining ~$300 billion of your purchase price back in about 7-10 years. You would then own all of Apple and its future earnings “for free.”
Even if Apple’s earnings shrink over the next few years–which I actually think is likely (Apple’s net income in the next quarter is expected to be down a startling 20% from last year)–it would only take 10-15 years for you to get your money back.
If Apple’s earnings grew instead of stayed flat, meanwhile–which isn’t inconceivable–you would get your money back even faster than 7 years.
In other words, unless Apple’s earnings really tank, and stay down, you will have bought a good company at a reasonable price.
Now, you are not going to be buying all of Apple anytime soon, so you can only think about the description above theoretically. But here is a more likely scenario.
A more likely scenario is that Apple’s earnings will stay flat or drop over the next several years, and Apple will start to get even more serious about returning some of its massive cash pile to investors.
To reiterate: Apple has ~$135 billion of cash.
And it is currently generating more cash at a rate of about ~$40 billion per year.
Apple has no idea what to do with this money.
No company needs $135 billion of cash.
In the past, Apple has demonstrated that it is not stupid enough to make huge, bad acquisitions (at least so far). So one can hope that Apple will not be stupid enough to make such acquisitions going forward.
So that leaves two other ways to use the cash mountain that Apple continues to pile up and doesn’t know what to do with:
Right now, Apple pays a ~$10 annual dividend. With the stock at $450, that’s about a 2.5% yield.
Paying this dividend costs Apple about $10 billion of cash per year.
Apple could easily afford to double this dividend to ~$20 per year.
That would create a 5% yield, which is an excellent yield. It’s also a much higher yield than almost every other stock in the market pays. And even this would only consume $20 billion a year.
And Apple could also easily afford to spend another $20 billion a year buying back its own stock. At $450 a share, this would shrink the share base by about 5% per year. So Apple’s earnings would be split up over fewer shares.
If Apple keeps earning $40 billion a year, and it returns $40 billion a year to shareholders, its cash balance will stay at ~$135 billion, which, again, is vastly more cash than it needs.
Apple could use $50-$100 billion of that cash to buy back stock, and that would shrink the share base even further.
All of which is to say, Apple has multiple levers at its disposal to return cash to shareholders and boost earnings per share irrespective of the business. And the business itself looks cheap relative to its current earnings stream.
Now, I am not suggesting that Apple’s stock is suddenly going to rocket back to $700. For that to happen, Apple would have to release another product that is a quantum leap over the competition, and it would have to sell hundreds of millions of units of this product before its competitors caught up. (As has happened with the iPhone).
I am also not suggesting that Apple’s stock won’t go lower from here. It may very well go lower from here. In fact, it may go lower and stay lower–forever.
As I described a few days before Apple missed Q4 expectations and the stock crashed below $500, Apple could be in the beginning stages of the same sort of implosion that it experienced in the 1990s–the same sort of implosion that has claimed Research In Motion, Palm, Nokia, Yahoo, AOL, Cisco, and dozens of other tech giants over the years. The stocks of these companies are trading at mere fractions of the highs they hit back when they were “must-own” stocks, barring miracles, they will never trade at those highs again. Apple is certainly not immune from this fate. And anyone who still thinks it is is not facing up to the reality of the situation.
But, Apple is also still a good company. And it has good products in fast-growing markets–smartphones and tablets. So if it can merely remain a good company, and keep pace with the competition (again, no guarantees), and if it begins to return even more of its vast cash mountain to shareholders, it should be able to maintain strong earnings per share, at least for a while.
And if Apple can do that, the stock doesn’t just look cheap. It is cheap.
As a reminder, no one knows what is going to happen to Apple over the next few years, including the folks at Apple. So don’t hallucinate that there’s some guru somewhere who can tell you. All of these scenarios are possible, including the “train-wreck” one. Stock prices represent collective guesses about what will happen in the future, and no one knows for sure what the future holds.
One final caveat…
Most of the folks who bought Apple stock over the past 5 years bought it because they considered it a “growth” stock, not a “value” stock. The scenario I described above is very much a “value” stock scenario. If Apple’s earnings do decline over the next couple of years, the “growth” investors who bought Apple’s stock will jettison it, and the “value” investors will have to buy it. This process will take time. So even if Apple does end up delivering a compelling return over the next few years, this “turnaround” will likely take a while.