MorningWord 9/18/13: Mobile Chip Wars Just Getting Started – $BRCM, $QCOM

by Dan September 18, 2013 9:17 am • Commentary

MorningWord 9/18/13:  The iPhone 5s is not even in stores yet and analysts who cover the smartphone supply chain are already looking forward to the next product cycle, in AAPL’s case, to a larger form factor next year that should see tremendous pent up demand.  Yesterday, Susquehanna Financial Group’s semiconductor analyst upgraded his rating on BRCM from Hold to Buy as he essentially thinks that a weak showing in the iPhone 5s is built into current estimates, but the potential for earnings re-acceleration in 2014 is not in the stock.  It appears the analysts new found enthusiasm rests on the potential of the company to start getting leverage on almost 2 years of heavy investment in their handset business, that could “generate annual eps well over $3” in 2015 (current consensus $2.98, so not a particularly bold call).

Despite yesterday’s upgrade, the Wall Street analyst community was already quite positive on the stock with 31 Buys, 15 Holds and 3 Sells, with an avg 12 month price target of $32.76.  The stock is fairly cheap to the broad market, trading at ~10x next years expected earnings and pays a 1.6% dividend yield.  The company has ~25% of its nearly $16 billion market cap in cash (~15% ex debt), which from a valuation basis places it fairly squarely in line with peer INTC, considering similar growth profiles.

I am certainly no semiconductor analyst, but the revenue exposure chart below of BRCM from Bloomberg shows the company’s considerable exposure to mobile devices (including tablets), as Samsung, AAPL, LG and Huwei, made up almost 40% of sales in 2012 (which is expected to grow), where as INTC is heavily levered to PCs.

BRCM splc


QCOM has been the clear leader in mobile chips, as that has been their core competency for decades, but with the PC market being ravaged by Tablets, INTC is aggressively moving their feet (albeit a tad late) to mobile as they ramp their Haswell and Bay Trails chip .  BRCM, while a smaller player by revenue dollars could offer INTC a better way to grab market share as the industry is adding another layer in mobile, wearable devices that QCOM is also getting out in front of with their recent introduction of Toq smartwatch.  I am not saying INTC should take a look at BRCM (they likely already have) but a time where old tech is struggling to maintain their relevance, silly deals can happen (see MSFT for NOK handset business), and this would be one well withing INTC’s capability given their strong balance sheet and the potential for massive cost savings.

BRCM has been a dog in 2013, down 17% ytd, recently trading at 4 year lows, and down 27% from the 52 week highs.  If BRCM is going to start to make a run at some of the mobile markets that QCOM has long dominated, the stock could not only catch investors eyes, but potential suitors given cheap valuation & solid balance sheet, but could also lever up a tad to increase buybacks and dividends.  Either way this one is on our buy list, stay tuned for ways to play with defined risk.