Broadcom Update :BUY Target Price $46

BRCM : NASDAQ : US$37.33
BUY 
Target: US$46.00

Technology — Hardware — Semiconductors and Related Technologies
STRONG QUARTER DRIVEN BY CONNECTIVITY GROWTH AND RESILIENT SERVICE PROVIDER
RESULTS; ALL EYES TOWARD ANALYST DAY

Investment recommendation:

Broadcom posted strong Q3/14 results with sales above our estimate driven by strong 20% Q/Q growth in Connectivity
sales with the inclusion of new 802.11ac WiFi solutions in key smartphone
launches including iPhone 6. Further, service provider sales were down only
roughly 2.5% Q/Q, better than feared given recent market commentary.
Finally, faster operating expense reductions post the decision to shut down
the cellular baseband business helped drive a solid beat on the bottom line.
We believe the stock will likely rebound post the recent sell-off in the group
and all eyes will then turn to Broadcom’s December 9 analyst day for future
growth strategy and increased capital returns commentary. We reiterate our
BUY rating and raise our target to $46 from $45 on increased estimates.

Investment highlights

 Q3/14 revenue of $2.26B was above our and consensus estimates of
$2.18B (see Figure 1) driven by a surprising rebound in baseband sales,
20% Q/Q Connectivity growth, and only a roughly 2.5% Q/Q service
provider sales decline in ING versus. Non-GAAP gross margin of 54.3%
was a bit below 55% guidance midpoint, but was very strong
considering the unexpected increase in baseband sales (roughly a 170
basis point gross margin headwind in total) and a greater mix of
Connectivity sales to large customers. We believe additional upside
exists to gross margin into 2015 for Q4/14 guidance of 55%. Non-GAAP
operating expenses were $10M below our estimate at $646M, and
management expects another $50M reduction in Q4/14 as baseband
costs continue to be wound down. Non-GAAP EPS was $0.91, $0.07
above our estimates and consensus.
 Given these significant cost savings of the baseband exit, we believe
gross margin can remain in the mid-to-high 50s and operating margin
will expand into the mid-to-high-20s during 2015. We maintain our
belief Broadcom’s core Home and Infrastructure businesses are well
positioned for solid growth and will benefit further from increased
management attention and investment post the baseband exit.

Valuation:

Our $46 price target is based on shares trading at roughly 14x
our 2015 pro forma non-GAAP EPS estimate.

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