This Stock Should Make for a Good Long-Term Investment
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The basic tenet of investing tells us to buy low and sell high. The “buy low” part is achieved when you have managed to hunt down a terrific company that’s undervalued, and this usually happens when the broader industry is going through difficult times. The “sell high” part can be attained if the company has solid fundamentals, which would enable it to ride the next boom phase successfully and help you score the desired returns.
It seems that I have found out a pretty good candidate which can fit into the buy low and sell high philosophy, and that is Broadcom (NASDAQ: BRCM). The company supplies chips for use across a wide range of applications, and seems well-positioned to gain from growth in several of its end-markets.
Broadcom’s free cash flow generation has gradually improved over time, appreciating almost 140% over the past five years while a debt to equity ratio of 0.23 establishes its credit worthiness. The company also sports a dividend yield of 1.3%, which further adds to the attraction. Moreover, it focuses a lot on product development, and makes cutting-edge solutions like this that are adopted at a decent pace by its customers.
Mobile Computing Strongman
Broadcom’s highly efficient portfolio of products has helped it land illustrious clients in the form of smartphone behemoths Apple (NASDAQ: AAPL) and Samsung. The company supplied its communication chips that enable Wi-Fi and Bluetooth connectivity for the iPhone 5, and even added to its presence inside the phone with a track-pad controller. In addition, Broadcom has two spots inside the just launched iPad Mini and three spots inside the fourth generation iPad.
All of these products from Apple’s stable had opened to strong sales, with the iPhone 5 moving 5 million units during the inaugural weekend and the new iPads moving 3 million units. Also, Broadcom’s chips are present inside Samsung’s Galaxy S III and Galaxy Note 2 devices, both of which are selling successfully.
But this is not the end. Broadcom’s chips seem to be omnipresent inside every major mobile device that is being manufactured nowadays. The Google Nexus 7 and Amazon.com’s Kindle Fire HD also make use of Broadcom’s chips for enabling wireless connectivity.
Apart from possessing an impressive suite of clients in the mobile computing department, Broadcom has other end-markets as well to drive its business. The company supplies chips for use in set-top boxes and expects to make the most out of the opportunity presented in Europe, North America and Latin America.
Also, Broadcom is poised to benefit from the growth in data centers in the long run through its interests in infrastructure and networking solutions. It occupies a leading position in Ethernet switching through chips that deliver better performance more efficiently. Moreover, Broadcom’s technological innovation has led it to introduce the first 28-nanometer communications processor product portfolio that should improve performance by 400% while reducing power consumption by 60%.
The introduction of such a product should help Broadcom gain more market share and profit tremendously from data center build out. Also, Broadcom has made a foray into connected cars and infotainment by way of a deal with Hyundai. The company already has a relationship with BMW and its BroadReach technology is already a standard in connected automotives.
Also, Broadcom is one of the pioneers in Wi-Fi technology. The company’s 5G Wi-Fi chips are finding good adoption and Broadcom has orders worth $100 million in the bag for these chips already. The company is ramping up production of these 5G chips which are expected to power most of the 3 billion Wi-Fi devices over the next three years.
A Small Hiccup
Broadcom has performed solidly over the past two quarters but expects its current quarter to be a dampener. The company sees low enterprise spending due to sluggish economic conditions, which has led telecom service providers to cut down their capital expenditure. This has affected communications equipment makers and component suppliers as well.
For example, Ciena (NASDAQ: CIEN), which was on a gravity defying run earlier this year was brought down to earth after posting its third-quarter results that came with glum guidance. Ciena’s management said that a soft macro environment was the reason behind the company’s pain as the company’s design wins were taking longer to operationalize due to low spending by telcos.
Hence, Broadcom is also going to feel the pinch as well. But, the company’s diversified businesses should probably help it mitigate the softness in the infrastructure and networking business. And if we look forward, telecom spending will resume and data centers for cloud computing will also be built, providing a push to Broadcom’s business.
Broadcom has all the makings of a solid company. Great clients, presence in growth markets, innovation, positive cash flow, low debt and a decent dividend are some of the characteristics that define Broadcom. Its presence across all the major mobile device makers is a huge plus, and Broadcom is looking to increase its dollar content inside successful smartphones and tablets.
The outlook for the current quarter might not be a great one, but from a long-term perspective, Broadcom looks like a good investment.
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