Name That Trade – $BRCM : Analyst Day

by Dan December 9, 2013 3:03 pm • Commentary

Broadcom has been a very dramatic under-performer vs the SOX and the broad market in 2013, down 16.5% vs INTC up nearly 21%, the SOX and the Nasdaq up nearly 35% each.  The company is holding their annual analyst day tomorrow morning at 8:30 am et, where Bernstein Research stated in a note to clients today:

Broadcom usually uses their December analyst day to provide an  update on Q4 guidance, and has raised guidance 5 of the last 6 years (the exception being the 2008  downturn). We note that current Q4 guidance (for a ~8% sequential decline) is well below typical performance (up ~1.5%)

When the company reported Q3 earnings on Oct 23rd they beat for Q3 but lowered Q4 calling for a greater than usual seasonally soft Q4.  To put BRCM’s history of weakness guidance in some context, JPM research highlighted in a note to clients on Oct 23rd:

the company guided for 4Q12 revenues to decline 2%-8%. At its Dec. 6, ’12 Analyst Day, BRCM revised their outlook to a decline of 2%-5%. Ultimately, BRCM reported a revenue decline of 2% for 4Q12.

So regardless what your broader fundamental thoughts maybe on BRCM competitive position with the likes of INTC & QCOM the set up into tomorrow’s events could be interesting for those nimble traders out there.  

Technical Set Up:

The year to date chart below shows the fairly tight range the stock has traded in since the Q2 miss and Q3 guide down back in mid July.  The stock has made numerous attempts at breaking through $28 but has failed to do so on four occasions.

BRCM ytd chart from Bloomberg
BRCM ytd chart from Bloomberg

It is our sense that the slightest bit of good news could cause that break out at 5 moth resistance and possibly cause a quick move to the 200 day moving average filling in a good part of the gap from July.  Obviously that IF, is a very big IF.

Valuation & Balance Sheet:

The stock is sorta of cheap, trading at 11.5x next years expected earnings, which are supposed to be down 9% year over year, on sales that are only expected to grow for the second consecutive year at low single digits percent.  This is in comparison to INTC and QCOM that both trade a tad above 13x earnings.  Relative to INTC it looks cheap as analysts expect no growth in earnings or sales in 2014.  Compared to QCOM not so much as the company is one of the few large cap semiconductor companies that the street sees earnings growing double digits and sales high single digits.

BRCM has a very strong balance sheet with 27% of their market cap ($4.3 billion) in cash, or about 17% net of their debt.  The company has committed to returning more than 60% of their free cash flow back to shareholders, paying a dividend that yields 1.59% and have a multi-billion share repurchase agreement in place.

Ways To Play:

IF I WERE INCLINED to play tomorrow’s event, and had money to burn and felt like gambling a bit I would probably just buy the Dec 13th (this Friday expiration) 28.50 calls (stock ref $27.75) for .22.  Break-even is at 28.77, up about 3.5%.  The problem with this trade is that if the stock doesn’t move or goes down you will watch that premium go away very quickly. So that trade is very binary.

The more SENSIBLE defined risk way to play would be to look out a bit to January and buy the Jan 28 calls for about .90, with break-even very near that of the Dec 13th weeklies described above, but gives you a lot more time to earn it out.  Much larger margin for error.

So while expectations are not high, the company usually likes to give investors a little something, maybe it has to do with cash return, restructuring or guidance, but my sense would be it wouldn’t take much to get it going……maybe event the entrance of an activist?