BRCM : NASDAQ : US$38.26

Target: US$46.00

Technology — Hardware — Semiconductors and Related Technologies

CEO Scott McGregor at
Broadcom’s HQ. – with stronger conviction that an exit
of the cellular baseband business will happen quickly and therefore are
more confident in our 2015 pro forma estimates excluding the baseband
business. We discuss drivers of solid growth for Broadcom’s retained
businesses and areas for incremental investment with cash recouped
from prior cellular baseband investments. We reiterate our BUY rating
and raise our price target to $46, as we assume our pro forma EPS
estimates post the baseband exit as the basis for our price target.
Investment highlights
 We assume a baseband business exit before the end of 2014. Given
the much lower gross margin of the baseband business likely lost
during this transition and the significant operating cost savings, we
believe gross margin can expand into the mid-50s and operating
margin will expand into the mid-to-high-20s exiting 2015.
 We believe Broadcom’s core Home and Infrastructure businesses are
well positioned for growth and could benefit further from increased
management attention and investment post the baseband exit. In
fact, we believe Broadcom’s Home business should grow in the mid-
to high-single digits with solid mid-20s operating margins. Further,
we believe the Infrastructure business is positioned to exceed 10%
top-line CAGR over the next several years, with operating margins
moving toward 40%.
 With our increasing confidence in an expeditious cellular baseband
exit, we are adopting our 2014/15 pro forma revenue and non-GAAP
EPS estimates of $8.4B/$2.58 and $8.3B/$3.28. Our estimates largely
exclude any additional initiatives that could be funded with
incremental investments from the baseband business exit.
Valuation: Our $46 price target is based on shares trading at roughly 14x
our 2015 pro forma non-GAAP EPS estimate of $3.28.


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