BRCM Q1 Report After the Bell, We Take A Quick Look

by Dan May 1, 2012 3:31 pm • Commentary

BRCM reports their Q1 tonight after the close.  The options market is implying about 7% vs the 4 qtr avg move of about 7.5%.

Tonight’s report could cause some confusion when initially reported, the company closed their acquisition of Netlogic in mid February and some analysts have included the contribution of the deal, which BRCM’s previous guidance does not include.

Expectations: 

Q1  .55 EPS, $1.8B in Revs, and 52% GMs  (company guided revs $1.7B to $1.8B)

Q2 .64 EPS, $1.97B in Revs, and 52.2% GMs

2012: 2.81 EPS, $7.97B in Revs

Some analysts expect about $40 to $50 mil sales in contribution from the Feb 17th close, while EPS should be about neutral for Q1.

Volatility:

Implied Vol has been creeping up going into earnings but not to ridiculous levels. It’s now just above its yearly implied average. Actual vol in the stock has been historically low lately:

BRCM HV, IV and IV360 from LiveVol Pro

 

Options are skewed to the downside with much higher vols in puts than the upside calls. May is higher than other months but not in a big way at all:

BRCM Monthly Vol Skew from LiveVol Pro

{##34##}Valaution:BRCM trades at only 13x 2012 expected 2012 earnings, which is not exactly unreasonable considering earnings and sales are expected to grow 10% and 8% respectively excluding NETL.

Our View: There does not appear to be an obvious trade in front of earnings as the stock is almost at the mid-point of the last 2 months range.

[caption id="attachment_11143" align="aligncenter" width="300" caption="BRCM YTD chart from Bloomberg"][/caption]

 

I guess the real unknown at this point is how management will guide for the balance of the year including NETL, this we obviously have no clue about and prefer to stay on the sidelines until we see the guidance.

Investors seem infatuated with suppliers to AAPL, and if this reporting season has demonstrated anything, it is that it is not always great for margins of suppliers, there is a reason AAPL is able to get the margins they do on their iProducts, they squeeze the crap out of their supply chain.

TRADES TO CONSIDER: Please check out discussion in quick hits (below) about the probability of success for both of these trades.  You must have conviction on direction and magnitude if you were to even consider either trade.

BEARISH: If you wanted to play for a miss and/or weak guidance you could look to buy out of the money Put Spreads, the May 34/32 Put Spread offered at .40 with the stock 36.34 offers a decent risk reward if you were looking to play for an outsized move of down 7% at the break-even point and down 11% at the max gain.

BULLISH: If you thought the company had some potential upside in their pocket as it relates to guidance with the combination of NETL then you could play for a near term bounce and look to buy out of the money call spreads.  with the stock at 36.34, the 38/40 call spread offered at .50 could be a decent do as this would get you back towards the late March high of approx $39.70.

TO BE CLEAR I HAVE NO STRONG OPINION ON DIRECTION, AND THINK THAT THE OPTIONS MARKET HAS THIS WELL PRICED. BUT IF YOU DID THINK AN OUTSIZED MOVE IS POSSIBLE, YOU SHOULD LOOK TO DEFINE YOUR RISK AND PLAY FOR THE MOVE IN EITHER DIRECTION WITH A FAVORABLE RISK REWARD RELATIONSHIP.

Both QCOM and SNDK experienced out-sized moves on misses that lasted for a few days.

 

FROM QUICK HITS:

May 1 2012, 3:45 PM

Dan: we offered some long premium directional trades for those of u who have conviction on direction and looking for ways to play for an outsized move

May 1 2012, 3:46 PM

Dan: problem with front month options in front of any event in a name like BRCM is that they are usually priced for perfection

May 1 2012, 3:46 PM

Dan: thats why generally we look to out of the money, but then the probability of success is much less

May 1 2012, 3:48 PM

Dan: in the 2 trade examples we give, we are doing neither, but as an excersize, lets consider the probabilities of success

May 1 2012, 3:49 PM

Dan: in the call spread, the may 38 call has a 34 delta, the options market is saying that the call has a 34% chance of being in the money

May 1 2012, 3:49 PM

Dan: on the put spread, the may 34 Put has a 25 delta or about a 25% chance of being in the money

May 1 2012, 3:50 PM

Dan: not exactly take it to the bank odds, but again you would need to have conviction on direction and magnitude to put either trade on

May 1 2012, 3:50 PM

Dan: we have neither so we avoid