Stock in Broadcom (BRCM) rose 9.32 percent to $34.84 per share Monday after the company announced it would exit its struggling cellular baseband business. Hiring the investment banker JPMorgan (JPM) to advise the company on its “strategic alternatives,” Broadcom expected that such a move might result in an annual reduction in costs of $700 million, which is approximately 19 percent of its total operating expenses for the last fiscal year.
According to a statement issued by the company, Broadcom expected to reinvest more than $50 million of the savings on an annualized basis into projects in the broadband, infrastructure, and connectivity businesses. Thus, the net reduction in annual costs will be around $650 million.
Irvine, Calif.-based Broadcom is considered as a leader and innovator in semiconductor solutions for wired and wireless communications. The products include seamlessly delivered voice, video, data, and multimedia connectivity in the home, office, and mobile environments. “Changing the world by connecting everything,” as Broadcom’s website boasts.
Broadcom’s chips for integrating Wi-Fi and Bluetooth technology are widely used in smartphones and tablets. More than half of the company’s profits come from its mobile and wireless business, but stiff competition from rivals like MediaTek and Qualcomm (QCOM) never stops.
Additionally, Broadcom on Monday updated its second quarter outlook. The company continued to expect a revenue of $2 billion to $2.1 billion against analyst’ consensus estimates of $2.05 billion. In the statement, Broadcom said it “now expects both GAAP and non-GAAP product gross margin to be at or above the high end of its previously-guided range, driven principally by mix.” The company's previous adjusted product gross margin view was for an increase of 75 basis points to 175 basis points. The wind down of the Broadcom unit may improve the positioning of peer Qualcomm and the firm also expects that rivals Avago (AVGO) and Skyworks (SWKS) will benefit from Broadcom's move.
Given this level of uncertainty, analysts find it difficult to justify the expectation of either a positive or negative performance for Broadcom’s stock relative to the market. Although the company has multiple strengths; including a largely solid financial position, good cash flow, and expanding profit margins; the stock itself has weaknesses, such as deteriorating net income and disappointing return on equity.
Broadcom’s stock does display some distinct positives among its fundamentals. The stock’s debt-to-equity ratio of 0.16 is lower than the industry average, implying that the company has successfully managed its debt levels. And the quick ratio of 2.40 appears to demonstrate an ability to cover short-term liquidity needs.
It’s not all good news for Broadcom investors, though. Its current return-on-equity ratio of 4.90 percent is lower than its ROE of 5.47 percent from the same quarter on year prior. Compared to the other companies in the semiconductors and semiconductor equipment industry, Broadcom’s ROE is below that of the Standard & Poor’s 500, which is could indicate the company’s underperformance.
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