The market has divided itself into two camps. The bulls argue that CA operates in a consolidated industry, where customers have high switching costs and limited alternatives. The bears argue that there is organic revenue shortfall that AVGO is trying to cover up via deals like QCOM and CA. RBC’s top analyst Amit Daryanani has found himself in the middle.
Daryanani wrote, “Since 07/12 we have had numerous discussions with clients regarding the CA transaction. While admittedly we struggle with the strategic rationale and lack of relevant transparency, CA from a financial perspective fits AVGO’s M&A model and its mainframe business has a more durable FCF compared to AVGO. Management perspective is that CA is a natural extension to their hardware presence in mainframes (BRCD & ELX have mainframe content) and using the prism of historical M&A models they see healthy accretion. Furthermore, management remain committed to dividends and buybacks could be opportunistic.”
“Net net, we think AVGO’s model can scale into software land and AVGO may have some unique characteristics that can help it win deals vs. PE firms chasing the same deals . Admittedly, multiple expansion will be difficult and stock will be driven by EPS/FCF growth,” the analyst concluded.
As such, Daryanani reiterates an Outperform rating on Broadcom shares, with a price target of $300, which implies an upside of 44% from current levels.
Daryanani is one of Broadcom’s biggest bulls, and he is also one of the top-rated analysts on Wall Street. According to TipRanks.com, Daryanani has a yearly average return of 25.6% and a 81% success rate. Daryanani has a 23.8% average return when recommending AVGO, and is ranked #26 out of 4843 analysts.
Out of the 33 analysts polled in the past 12 months, 25 rate Broadcom stock a Buy, while 8 rate the stock a Hold. With a return potential of 46%, the stock’s consensus target price stands at $304.62.