Morgan Stanley Names Broadcom Top Pick For The Remainder Of The Year

It’s common knowledge that semiconductor stocks have been on a tear this year. Less obvious, is that Broadcom Ltd (NASDAQ: AVGO) could be the second half’s best performer.

Morgan Stanley analyst Craig Hettenbach reiterated an Overweight rating on Broadcom shares with a price target raised from $280 to $290.

Hettenbach believes that the Street’s earnings estimates for fiscal 2017 and 2018 are too conservative.

After raising both, the analyst forecasts $15.86 2017 EPS and $17.66 2018 EPS. Consensus places them at $15.77 and $17.10, respectively.

“We see multiple catalysts in the [second half],” said Hettenbach in a note.

Nearest in the future is the completion of Broadcom’s acquisition of Brocade Communications Systems, Inc. (NASDAQ: BRCD). The $5.9 billion deal is expected to close by the end of the month and add up to 9 percent to EPS. Brocade’s additional revenue is looking to be $1.4 billion in fiscal 2018.

Broadcom is also set to grow on Apple Inc. (NASDAQ: AAPL)’s iPhone sales. The dollar-value of Broadcom content in the next generation of iPhones is expected to be 40 percent greater than that of the iPhone 7.

There is risk though in disappointing iPhone 8 sales. Sales to Apple make up nearly 20 percent of Broadcom’s total. Speculation of high price points and growing competition from foreign smartphone makers are contributing to investors’ concerns.

Broadcom will be hard-pressed to develop and execute new technologies to stay on top, but Hettenbach sees potential in new custom applications such as touch and wireless charging.

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