Leading semiconductor manufacturer Broadcom Limited AVGO is scheduled to report its first-quarter fiscal 2016 results after the closing bell on Mar 3. In the last reported quarter, Broadcom’s adjusted earnings comfortably exceeded the Zacks Consensus Estimate by 14 cents.
The company has beaten earnings estimates in each of the last four quarters with an average positive earnings surprise of 7.7%. Let’s see how things are shaping up for this announcement.
Key Factors in the First Quarter
During first-quarter 2015, Avago Technologies merged with rival Broadcom Corp. after securing an unconditional approval from the European Union and renamed itself as Broadcom Limited. The deal worth $37 billion is arguably the largest of its kind in the semiconductor chip industry and has created a behemoth with one of the most diversified communications platform in the semiconductor industry at combined annual revenues of approximately $15 billion.
The transaction is expected to boost the bottom line by trimming operational costs. In addition, the deal will help the combined company traverse new geographical barriers, with blue-chip companies as avid customers and technological products that are in high demand, resulting in incremental revenues.
Synergistic benefits from the merger are likely to increase profitability through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction will likely result in $750 million of annual cost synergies within the first 18 months of operation and is expected to be immediately accretive to non-GAAP earnings and free cash flow.
In addition, Broadcom aims to minimize capital expenditures by focusing on internal manufacturing capacities, leveraging innovative materials and processes to protect intellectual property rights while outsourcing standard complementary metal oxide semiconductor (CMOS) processes. These have enabled the company to historically maintain sustainable revenue growth and expand margins. Broadcom is expected to maintain its top-line growth in the soon-to-be-reported quarter, with substantial market share from the combined resource pool from the merger.
Earnings Whispers
Despite some inherent strengths, our proven model does not conclusively show that Broadcom is likely to beat earnings this quarter as it lacks the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently at 0.00%.
Zacks Rank: Broadcom’s Zacks Rank #1 increases the predictive power of ESP. However, earnings ESP of 0.00% makes surprise prediction difficult. On the other hand, the Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.
Stocks to Consider
Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Superior Industries International, Inc. SUP, earnings ESP of +11.11% and Zacks Rank #1.
Aduro BioTech, Inc. ADRO, earnings ESP of +271.43% and Zacks Rank #2.
BioDelivery Sciences International, Inc. BDSI, earnings ESP of +3.64% and Zacks Rank #3.
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