Broadcom (AVGO): The Financial Rationale Behind CA Deal Makes Sense, This Analyst Remains Bullish on the Stock

Has Wall Street gone a bit overboard punishing Broadcom (NASDAQ:AVGO)? The chip maker’s share price continues to fall Thursday after the company announced a definitive agreement to purchase mainframe/enterprise software player CA for $18.9 billion in an all cash transaction. This move is truly a head-scratcher for investors, who sent the company’s shares skidding 15%.

However, Susquehanna analyst Christopher Rolland likes the financial rationale for the deal: “While more details are to come, we took an early stab at the numbers. After synergies, we believe Broadcom may generate as much as $2.00 to $2.50 of EPS accretion. While perhaps a stretch for CA, Broadcom has historically eliminated ~40% of a target’s SG&A costs. Additionally, Broadcom has historically eliminated ~15% of R&D expense, primarily as they shutter low-ROI projects on the roadmap (instead focusing on existing “cash cow” franchises). This combination of cuts could drive CA’s existing EPS +50% higher than today’s standalone $2.77 (Street 2019E), and values the company at just ~11x after synergies.”

Furthermore, Rolland believes the deal gives Broadcom a longer M&A runway: “After the blocked hostile attempt to purchase Qualcomm, Broadcom was running out of viable M&A targets in the semiconductor industry given: 1) rapid industry consolidation eliminating many highvalue and logical targets; 2) increased international regulatory scrutiny, particularly from MOFCOM, exacerbated by U.S./Chinese trade tensions; and 3) increased CFIUS and antitrust risks. Deals in the software industry likely mitigate these issues.”

Net net, Rolland reiterates a Positive (AKA Buy) rating on Broadcom shares, with a price target of $305, which implies an upside of 48% from current levels. (To watch Rolland’s track record, click here)

Most analysts back Rolland’s confident take on the semiconductor firm, as TipRanks analytics showcase AVGO as a Strong Buy. Based on 25 analysts polled in the last 3 months, 23 rate a Buy on Broadcom stock while only 2 issue a Hold. The 12-month average price target stands at $309.32, marking a nearly 50% upside from where the stock is currently trading.

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