Broadcom (AVGO): Time For Another Deal? - RBC

RBC analyst, Amit Daryanani, speculates that Broadcom (NASDAQ: AVGO) is ready to go shopping again. Post-AVGO’s June 2 earnings report, the analyst, spent a fair amount of time with clients to discuss AVGO’s capital allocation strategy, specifically M&A vs. material debt paydown. AVGO's interim CFO Tom Krause (who heads corporate development) on the latest earnings call discussed his intention to limit debt paydown and bolster cash position for incremental M&A.

In the Company's prepared remarks on the call, Mr. Tom Krause noted, "Going forward, we believe acquisition opportunities will continue to present themselves, but under our business model, we'll drive returns that far outweigh alternative uses for our capital. As a result, we currently intend to limit the paydown of our expanding term loans until our gross debt is approximately two times EBITDA, at which time we intend to start pooling excess cash for the purposes of M&A..."

Fundamentally, AVGO remains on track to sustain nearly $16.00 EPS by FY19 and stock should work towards $200+ over 12-18 months. The analyst believes large deals (>$10B) have a higher probability to occur 12-months out and near term potential is for smaller (sub $5B) deals. While investor reaction to deals vary, if deals can approach AVGO’s 40% operating margin target and provide EPS accretion, they would be viewed favorably given AVGO’s track record.

The firm believes Maxim Integrated Products (NASDAQ: MXIM), Skyworks Solutions (NASDAQ: SWKS) and Xilinx (NASDAQ: XLNX) could be attractive for AVGO as mid-to-large cap ($10-$15B) assets, while Integrated Device Technology (NASDAQ: IDTI), Intersil Corp (NASDAQ: ISIL), M/A-Com Technology Solutions (NASDAQ: MTSI) could be attractive smallcap (<$5B) assets.

The firm reiterated a Top Pick rating and price target of $185 on AVGO.

For an analyst ratings summary and ratings history on Broadcom Limited click here. For more ratings news on Broadcom Limited click here.

Shares of Broadcom Limited closed at $133.71 yesterday.

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