Broadcom: The Forecast Says It'll Outperform
Since the last time I wrote about Broadcom (BRCM), the share price of the company is flat, which is better than down. In this report, I add to the previous one with updated valuations and a portfolio analysis perspective. Simply said, Broadcom continues to be undervalued.
But not only is it undervalued, based on my analysis, I expect Broadcom to outperform the S&P 500 over the next 52 weeks. While the S&P 500 is forecasted to increase about 6% over the next 52 weeks, Broadcom is forecasted to increase 40%. The increase in the share price could be boosted by an increase in net income.
As net income increases, the amount of growth priced into the shares of Broadcom decreases. Consequently, the share price would rise to maintain the same level of growth expectations priced in the share price. Also, Broadcom is undervalued relative to its historic valuations.
For the long-term investors, I'm forecasting a revenue CAGR of about 6.25%, which means that your investment would almost double over the course of 10 years, if the price/sales multiple doesn't expand or contract and the revenue forecast is accurate. All of that said, I'm bullish on Broadcom.
In this section, I'm going to use a few models to value the common equity shares of Broadcom. I'll update the discounted cash flow model and the multiplier models. Also, I'll include an estimate of the market's growth expectations. The following data suggest Broadcom is undervalued.
In terms of discounted cash flows, I'm revising down my estimate of the intrinsic value of Broadcom using the discounted cash flow method. The cash flow estimates and growth rates remain the same: I continue to expect an 8% growth rate until a decline to the sustainable growth rate of 5% in 2018. But I revised the firm's cost of equity. As a result, I estimate the intrinsic value, using this model, of Broadcom as $19.07. Based on the current share price, the market is probably pricing in a higher growth rate than I am pricing. So, next I'll estimate how much growth the market is pricing into the share price.
When I use the twelve trailing months EPS, 65% of the market price is because of growth. That said, I adjusted the twelve trailing months EPS because of the $501 million impairment of purchased intangible assets charge. When I did that, 24% of the share price is because of growth, which is more reasonable. I think that number could increase to 40% without pricing in too much growt