BRCM $40.40
EVENT: Report Q1 Earnings April 26th After the close.
-Options market currently implying about a 4% move vs the 8 qtr average move of ~5.5%.
PRICE ACTION / SENTIMENT
-Last week on the heels of solid results and guidance from its semiconductor peers TXN, INTC and QCOM , BRCM was up ~6% in sympathy…….The stock remains down ~7% ytd currently under-performing many of its peers, Nasdaq and the SOX, which are up 6.3% and 7.6% respectively.
-Analysts are generally positive on the name with 27 Buys, 9 Holds and only 4 Sells and an average 12 month price target of about 47.50.
-Since CSCO’s disappointing earnings and guidance released in February (CSCO currently makes up ~7% of BRCM’s sales), short interest has crept in the name to about 3% of the float.
-In the latest 13F filing available From Q4 2010, 11 of the top 15 holders added to positions, while only 3 meaningfully trimmed.
TECHNICALS:
-Until this week the chart had been in a fairly nasty downtrend since making multi-year highs in January, making a series of lower lows and lower highs, suffering an almost 20% peak to trough draw-down. As stated above the stock has retraced some of that move, but remains well off of this years highs……
-2 Year chart below is a bit more constructive, showing a massive up trend from the March 2009 low, which converges at the recent down trend from earlier this year, with the recent gap above a key support level around 38.00
[caption id="attachment_1367" align="aligncenter" width="442" caption="2 Yr BRCM chart Livevol Chart"]
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FUNDAMENTALS: BRCM COULD BE ONE OF THE BEST PURE PLAY’S ON AAPL, AND THE CONTINUED TREND TOWARDS SMARTHPHONES AND TABLETS
As noted by JP Morgan Semi Analyst Harlan Sur (who has BUY and a $55 target) last week in in a note to clients April 19th, 2011:
-“The partnership with Apple remains strong as Apple uses Broadcom in a majority of its products, including the iPhone, iPad, iPod touch, Apple TV, Macbook Air, and Macbook Pro.”
– “BCM4330 (wireless lan chip)has also captured major design wins with Samsung and HTC next generation smartphone families. The BCM4330……. is being used today on the iPhone 4, iPad 2, Samsung Galaxy S, Samsung Galaxy S 4G, HTC Evo 4G, Motorola Atrix, and several tier-1 non-Apple tablets.”
-“Company continues to stay two-steps ahead of its competitors on connectivity and we believe the company will continue to dominate the market. The BCM4330 marks Broadcom’s 3rd generation high-volume combo-connectivity product and we believe that competitors (Qualcomm, Texas Instruments, Marvell, and CSR) are at best ramping their first generation products this year.”
-Most analysts took AAPL’s results last week as a mild positive for BRCM, as the company stated that they did not see any material disruption to their supply chain from Japan’s earthquake/tsunami.
-But some remain cautious on the legacy wireless business through the June quarter period as TXN’s guidance and commentary from OEMs such as NOK suggest some continued weakness in 2.5g phones that BRCM still remains exposed too.
-Additionally, risk to BRCM being perceived as a play on AAPL’s smartphone growth, makes it exposed to a rumored push out of iPhone5 release to the fall or possibly early 2012, and could cause investors to take further caution.
-stock got hit in January as company has displayed operating expense growth higher than that of revenue growth, which is likely to continue into the current period as hiring and litigation costs have gone up, but Bulls argue that expense associated with hiring for new products roll-outs should add eps leverage when coupled with the potential for lower litigation expenses in the 2nd half.
VALUATION: stock trades at ~21.5x 2011 and 18x 2012 consensus eps vs expected sales growth of ~15% and 11% respectively, which is not expensive to its 5 yr historical average of somewhere in the mids 20s, but a fairly size-able premium to many of its peers.
MY VIEW: Of late I have had a hard time finding the silver-lining in many single stock stories, especially when regardless of recent market enthusiasm, I remained convinced the US will experience a second half slowdown. But that doesn’t and shouldn’t mean that I should neglect near-term opportunities to make money on the long side when opportunities present themselves…..
-As noted above, even with last week’s rally, BRCM continues to under-perform and more favorable guidance on Tuesday could cause investors to rethink their cautious stance on the name……I want to look to the options market to make Short Term Bullish bet into earnings and define my risk.
TRADE: BRCM (stock ref 40.40) BUY MAY 42 / 44 CALL SPREAD FOR .50
-BUY May 42 Call for ~.80
-SELL May 44 Call at ~.30
Break-Even on May Expiration:
Upside: stock btwn 42 and 42.50 lose up to .50, stock btwn 42.50 and 44 you make up to 1.50, BEST CASE stock higher than 44 ( up ~9%) you make 1.50.
Downside: stock btwn 42 and 42.50 can lose up to .50, below 42 lose all .50
TRADE RATIONALE:
-The Implied Move appears to priced reasonably fair with at the money vol offered at about ~32.50 which is mildly rich to the ~28.5 30day realized, but cheap to in-line with the 60 and 90 day realized. In the last 8 qtrs the stock has had 2 moves above 10% following earnings and 3 btwn 5% and 8%, so the stock can be volatile and usually is volatile around earnings.
-Want to use call spread to define risk, while also agreeing on a risk reward relationship that make sense…..
-If we get a move higher on better earnings guidance, the stock would have a very difficult time near term making new 52 week highs, but could very easily see $44-45.
*Also I want to make a point about my use of vertical spreads into events……As an active trader of options untied to stock as a way to express directional views I have found that the added sale of the further upside call or downside put has saved me a lot of money over time……This is especially true around stories that I feel that I have a good handle on…..When you have a high level of conviction this should also include ideal entry and exit points on a trade, or using technical analysis to help inform those points. Additionally using fundamental inputs, such as historical valuation levels or within a peer group, such inputs are front and center to how I set my strikes. Not sure about you but this game is more like Jeter than Giambi…singles and doubles with the occasional triple…..I am not going to be right all the time, heck if I am right just a little more than I am wrong in most instances with a bit of consistency this will be a win.
**ANOTHER ALTERNATIVE FOR LONG HOLDERS LOOKING TO ADD LEVERAGE TO AN EXISTING POSITION YOU COULD LOOK TO BUY A MAY 1×2 CALL SPREAD AS AN OVERLAY. I suggested this last week prior to INTC’s report and it would have worked out nicely….
TRADE EXAMPLE AGAINST A LONG POSITION:
-Long BRCM at 40.40
-Buy 1 May 42 call for .80 and
-Sell 2 of the May 44 calls for a total of ..60 (.30 each)
SO the BRCM May 42/44 1×2 Call Spread costs you .20, against a long stock position.
Break-Evens on May Expiration:
Downside: if the stock is below 42 you suffer loses below 40.40 as you would if you were just long the stock plus the loss of the .20 in premium that you paid for the call spread…….
Upside:
-Btwn 40.60 and 42 you make the gains of your long stock,
-Btwn 42 and 44 you can make up to 1.80 plus the gains in your stock.
-Best case the stock closes at 44 (up 9% ) and you would make 3.60 in your stock and you make 1.80 in the call spread (or almost an extra 4.5% yield) from the spread.
-Stock above 44 on May expiration your long stock is called away up 9% (like and overwrite) and your call spread is worth 1.80…so you have effectively sold your stock at 45.80 (up almost 13.5%)